Euro Area's weaker inflation outlook to trigger accelerated purchases

Euro Area's even weaker short-term inflation outlook due to negative spillover effects from depressed global demand is likely to result in accelerated asset purchases. Around €20bn of additional asset purchases are likely per month by the end of this year, adding also corporate bonds, in such a scenario. 

"In a scenario of recession with deflationary risks, more aggressiveness is likely from ECB, adding up to €40bn to its monthly purchases, but with limited ability to maintain such a loose policy with the current issue share limits", says Societe Generale. 

The ECB is likely to have some further room to raise the issue share limit, as indeed it has to include new assets, such as bank bonds, equities and even foreignassets, depending on how the exchange rate develops. 

"If a deflationary scenario expands over time, the ECB is also expected to consider cutting the deposit rate, adding more liquidity and trying alternative communication strategies, including rate guidance (Forward Guidance) and possibly explicitly allowing for a longer period to reach the inflation target", added Societe Generale.

Changing the definition of price stability or discussing permanent increases in the balance sheet ('helicopter money') are mainly options in the very long term if everything else fails.