Gilles Moëc (pictured), head of developed Europe Economics at Bank of America Merrill Lynch (BAML) argues that the potential sovereign QE announcement on 22 January at the ECB meeting and Greek elections on 25 January are likely to be two of the most important events of the year.
We expect the ECB to announce government bond buying (without adding corporate bonds) of between EUR 500 and EUR 700bn over 18 months that includes all investment grade government bonds, with a monthly or quarterly pace for the purchases and a generic description of the distribution of the purchases across constituencies, which we think will be a combination of capital key and bond market size. Our baseline is that the program will be mutualized (but with a low level of confidence) and the ECB would retain considerable discretion on the details of the purchases.
The crucial issue though, in our view, is not on the technicalities of QE, but whether or not the ECB will manage to create an “open ended” feel to its program. We think the ECB will do it by distancing itself from the “intermediate target” – the size of the balance sheet expansion – to re-focus attention to the “final target” – delivering on price stability. A key issue for us is whether this “open ended feel” could be created in the prepared statement – this would be powerful – or, as we think is more likely only in the Q&A.
Greece is due to hold elections on 25 January with Syriza leading in the latest opinion polls. Our baseline is that the newly elected government on 25 January and the Troika will be strongly incentivised to avoid extreme outcomes. However, we expect difficult negotiations that could trigger more market volatility, while risks could remain high for most of the first half of the year.
Other than that, after incorporating the latest oil price move, we expect headline inflation to remain in negative territory for most of 2015 (until December). On a core basis, we still expect inflation to move sideways for most of 2015 around current levels. Catalan elections on September 27 add to the existing political risks in Spain that we have already highlighted with parliamentary elections at the end of this year.