The European Central Bank is widely expected to unveil a massive quantitative easing plan on Thursday, but confusion remain as to the size of the much anticipated stimulus aimed to avert the threat of deflation and revive the euro area economy.
The QE programme, initially seen to be around EUR 500-550 billion, could include buying government bonds despite strong criticism from Germany. Recent rumors in the press suggest the central bank may exceed expectations and announce a package in excess of EUR 1 trillion.
Reports citing ECB sources said the bank may opt to buy EUR 50 billion of bonds per month. The plan was also rumored to run through 2016.
After the December meeting, ECB President Mario Draghi strongly signaled that the bank was preparing to launch stimulus measures early this year. Recent data and rhetoric from ECB policymakers have supported the view.
"The absence of any significant change in the macro-economic situation since the December meeting, strong official comments that the ECB was ready to start, and an insufficient increase in the ECB's balance sheet following the second TLTRO have clearly paved the way for QE," ING Bank NV economist Carsten Brzeski said.
"High market expectations and the latest weakening of the euro exchange rate have, in our view, made a QE announcement inevitable."
Speculation of a full-blown QE programme last week prompted the Swiss National Bank to abandon its CHF-EUR floor and take its deposit rate deeper into negative territory.
The surprise SNB move whipped up the markets after the Swiss franc surged more than 30 percent against the euro.
Subsequently, the Danish central bank also came under pressure and slashed interest rates this week to equal ECB's rates. The bank acted due to the steady upward pressure on the Danish krone amid the SNB move and speculation of the ECB QE.
The rate cut fueled speculation that Denmark may also abandon the krone's peg to the euro that has been in place since the launch of the single currency. Previously, the krone was pegged to the Deutsche Mark.
However, Danish policymakers have asserted that they will preserve the krone-euro peg, saying they have other policy tools at their disposal to react to further upward pressure on the krone.
Further, QE hopes were strengthened after ECB's earlier bond-buying programme known as the Outright Monetary Transactions (OMT) won a crucial legal backing from the top EU court last Wednesday.
Even as the ECB QE seems a done deal, the Greece election on January 25 casts a cloud. The anti-austerity Syriza party has maintained a lead in the polls and plans to seek debt renegotiation if it comes to power.
That said, the ECB risks a severe knee-jerk market reaction if it disappoints on QE. Last week, ECB Executive Board member Benoit Coeure said quantitative easing should be big to be efficient. He also said the bank will consider the U.S. and British experiences to determine the amount of bonds to buy in order to restore confidence in the inflation target.
The ECB aims to keep euro area inflation 'below, but close to 2 percent'. Economists reckon that a QE programme of at least EUR 700 billion is needed to achieve the bank's goal of boosting its balance sheet size back to EUR 3 trillion.
Eurozone inflation turned negative in December for the first time in more than five years in December with consumer prices falling 0.2 percent. Falling oil prices are set to make the picture murkier.
Regarding the composition of the ECB plan, economists list some available options to the bank. According to them, the bank may opt to restrict purchases to investment grade bonds, which would make it immune to any impact from Greece election.
ING Bank's Brzeski said even bonds of bailout programme countries could also figure in ECB's buy-list.
"We would expect this along the entire curve as this should give enough flexibility to deal with negative yields in core countries," the economist said.
"Whether QE would include corporate and supranational bonds continues to be an unsolved issue."
Another option reported in the press suggests a restriction on risk-sharing under which some asset purchases will be done by national central banks rather than the ECB. The size of such purchases will be relative to the national central banks' share of the ECB capital key or equivalent to the country's share of euro area GDP.
Economists warn such an approach could give a poor signal regarding single monetary policy, sparking fears of disunion.
"And by limiting risk-sharing, it would presumably reduce the potential effects on the more indebted countries," Capital Economics economist Jonathan Loynes said.
"Markets are unlikely to view heavy Bank of Italy purchases of Italian government debt very favorably."
The Governing Council, led by Draghi, is set to announce the interest rate decision at 7.45 am ET on Thursday following their meeting in Frankfurt. The bank is expected to leave interest rates unchanged for a fourth straight month.
The main refi rate is expected to be held at a record low 0.05 percent and the deposit rate to be kept -0.20 percent. The marginal lending rate is likely to be held at 0.30 percent. The three main interest rates were lowered by 10 basis points in September.
Thereafter, Draghi will hold his customary post-decision press conference at 8.30 am ET at ECB's new premises at Grossmarkhalle, the old wholesale market of the city.
His words will be watched keenly for the ECB's determination in defending its inflation target and further details on the much-expected QE plan. He is also expected to reveal whether any stimulus decisions were unanimous or not and throw light on the debate that took place among members.
Starting in January 2015, rate-setting sessions will be held every six weeks instead of once in a month. The next session is scheduled for March 5 in Cyprus.
The bank had also announced that it will release the minutes of the session starting with tomorrow's meeting. The accounts will be released four weeks after each meeting. They will not reveal the voting pattern.
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May 22, 2026 14:46 ET Minutes of the latest Fed policy session was the highlight of the week along with survey data on the U.S. housing market. In Europe, survey data signaled the trends in the euro area private sector. Further, consumer price inflation data from the U.K. was in focus. In Asia, various economic indicators from China drew attention to the health of the economy.