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• Amidst falling inflation expectations, anaemic growth prospects and mounting pressure to act, we expect the ECB to embark on sovereign quantitative easing (QE) in the first quarter of 2015.
• Although resistance to sovereign debt purchases by the ECB is high, monetary action seems more palatable to opponents than political action, such as some form of fiscal risk sharing.• In our view, both the size and the synthesis of the ECB’s QE matters. The size of QE matters mainly in terms of ring-fencing the ECB’s credibility as price stability defender and in terms of currency depreciation.
• The ECB should also broaden its purchases of private assets in order to target more effectively lending to SMEs, which are highly dependent on bank lending and continue facing fragmented financial conditions.