Nomura’s baseline is that at its meeting this week, the ECB twill communicate a monthly flow of public and private sector asset purchases of at least €40bn per month (calibrated upon reaching €3trn by end-2016), for as long as necessary conditional upon the inflation outlook.
“The respective sovereign bond purchases would be close to €25bn per month, allocated according to the ECB capital key (with small adjustments to control for too-small markets in some countries). We believe such a state-contingent flow approach is essential to allow the ECB to maximise flexibility and credibility (and is not prevented by the recent ECJ Advocate General Opinion on the OMT). Such an announcement would give markets the greatest certainty that the ECB is prepared to do “whatever it takes” to try to return inflation to its target, a crucial signal when inflation expectations are particularly low,” Nomura argues.
“We expect the Governing Council to compromise on the risk sharing of its QE programme. Full risk sharing is unlikely, reflecting political economy constraints. While localising risk to the national central banks may help deliver a stronger consensus on the Governing Council, we continue to believe an absence of risk sharing is a bad signal with respect to the singleness of monetary policy and could be self-defeating, undermining the attempt to address fragmentation across the region and risking damaging market sentiment. That said, although not first best, a compromise on risk sharing would be preferable to limiting the size and duration of ECB QE, in our view,” Nomura projects.
“The ECB will likely remain vague about the maturity spectrum for QE in any announcement, as was the case for CBPP3 and ABSPP. This would allow national central banks some margin to determine what segment of the curve they might purchase in their home markets, although the vast majority of purchases are likely to be in the 3yr to 10yr segment, in our view,” Nomura adds.
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