ECB: QE volume to be increased – Danske Bank

The COVID-19 situation evolves on a daily basis. With the lockdown in Italy at the weekend, economists at Danske Bank have observed a credit element added to markets, and particularly the Italian bond markets, which they believe the ECB needs to address.

Key quotes

“The ECB may increase the ISIN limits, but with the ‘small’ scale up to EUR30-40bn / month, it may not be needed at this stage and the ECB will call for flexible implementation.”

“We believe that the ECB wants to step up its QE even before the tasked committees come up with their conclusions. The size of the scale-up is uncertain, but we think they will come in the EUR30-40bn range on Thursday.”

“We have seen market-based inflation expectations dropping. The 5y5y inflation swap declined 6bp to 0.96%, a new record low, and worrying to the ECB is also the fact that the inflation option market is now pricing in a 5% probability of deflation in 5y.”