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15 Oct 2014
ECB running out of “ammo” - BAML
FXStreet (Guatemala) - Mark Capleton, Rates Strategist at Bank of America Merrill Lynch explained the last - many would say only - as yet untouched "bazooka" at the ECB's disposal is seen as sovereign bond QE.
Key Quotes:
“However, given its political obstacles, it may at least be worth considering another differently radical option - Temporary Index Level Targeting (TILT)."
"Under such a policy, the ECB would commit to tolerating a future 2% inflation target overshoot until it forecasts any period of inflation undershooting to have been reversed. Now this is certainly a low probability outcome but it does have the advantage that it requires no action. It is verbal intervention - hard guidance."
"We mention it as a tail risk because it would serve to undermine bearish positions in longer term forward EUR rates in a dramatic way”.
“It would also lead to a big change in the relative appeal of short-term deflation protection versus long-term deflation protection in the inflation options market, enhancing the case for trades that look attractive to us anyway."
Key Quotes:
“However, given its political obstacles, it may at least be worth considering another differently radical option - Temporary Index Level Targeting (TILT)."
"Under such a policy, the ECB would commit to tolerating a future 2% inflation target overshoot until it forecasts any period of inflation undershooting to have been reversed. Now this is certainly a low probability outcome but it does have the advantage that it requires no action. It is verbal intervention - hard guidance."
"We mention it as a tail risk because it would serve to undermine bearish positions in longer term forward EUR rates in a dramatic way”.
“It would also lead to a big change in the relative appeal of short-term deflation protection versus long-term deflation protection in the inflation options market, enhancing the case for trades that look attractive to us anyway."