The ECB has little choice but to get into the QE business, says BNP Paribas, noting persistent surprises to the downside in inflation "eroding the safety margin against deflation ... Additional conventional policy easing will not deliver sufficient monetary accommodation for the price stability mandate to be met."
Annual inflation in the eurozone is running at 0.7%, far below the roughly 2% target of the central bank, and Goldman Sachs predicts the rate will fall to just 0.4% in March.
BNP sees €300B-€500B of purchases in the initial phase of an ECB QE program likely to commence in H2. The impact, says the bank, will be a big one, particularly in the government bond rates of Spain and Italy which would fall 60-80 basis points across the curve. This just in: Spanish and Italian 10-year paper yields 3.54%, just 87 basis points more than U.S. 10-year Treasurys. Is it conceivable that Spanish and Italian 10-year notes will yield less than Treasurys by year-end?