ECB QE programme's length extension unlikely to be a big surprise to the markets

Given the latest decline in Euro area's inflation and as the programme is designed to run until there is a sustained adjustment in the path of inflation. An extension of QE for more than six months would likely be somewhat of a surprise, but we still expect the market impact to be relatively subdued from this move.

The second most likely change to the QE programme would be to expand the monthly purchases above EUR60bn. The benefit of this would be a stronger signal from the ECB that it is willing to fight the current very low level of inflation and hence it would be more supportive for inflation expectations. 

An argument in favour of expanding the monthly purchases would thus be that the ECB sees an urgent need for boosting the balance sheet and wanting to front-load the impact, as it did when announcing the monthly purchases of EUR60bn. 

In January, the ECB focused on the overall volume of the purchases rather than the length of the programme. Assuming this view is still held, the ECB could scaleup its monthly purchases by 50% to EUR90bn, reaching around the same overall target as under a six-month extension of the current monthly purchases. 

Such an increase would likely be perceived as aggressive and even expanding the monthly purchases to EUR75bn would be seen as a strong signal from the ECB. The main scenario reflects a combination of the two possibilities above. 

"The ECB is likely to stick to its focus on the overall volume of the balance sheet and based on an EUR15bn increase in the monthly purchases to EUR75bn and a three-month extension, the ECB balance sheet to reach EUR3.6trn at the end of December 2016, where the ECB to end its QE programme", says Danske Bank.