The likelihood of further ECB easing has increased after ECB President Mario Draghi a week ago mentioned in his speech declining inflation expectations in August. However, we expect no QE or rate cuts but that the statement will reflect this very dovish stance at the September meeting.
The comment has fuelled QE expectations as Draghi previously has coupled de-anchored inflation expectations with large scale asset purchases. However, we still believe the bar for QE is high at least in the near term and instead we expect more details on an ABS programme at the meeting.
Compared to QE, ABS purchases should also be much more effective from a growth and inflation perspective in the euro area, where the economy is based on the bank lending channel. This is in contrast to the US economy, which is based on capital markets.
Even though it is not our base case for ECB policy in the near term, we take a look at how the ECB might engage in a large scale asset purchase programme. We look at the size of the programme, which assets could come in play and how the country distribution could look like.
Using the ECB capital key as weight of purchases across countries suggests the largest purchases of government bonds should happen in Germany and France and the biggest effect should be expected in countries with low public debt (e.g. the Netherlands and Finland).
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