Let’s get this out of the way first. The ECB will expand the QE program at Thursday’s Governing Council meeting. In a comment last week we suggested another QE “envelope” of 750 billion euros as a base case. We haven’t seen consensuses estimates, but we can imagine some folks have come up with lower estimates than that. After all, the worst of the crisis is behind us.
Regarding the nuts and bolts of the program, leading ECB Board Members have suggested the ECB will not drop the capital key, but instead continue to apply it flexibly. The message here is that the ECB will step up purchases in certain member states if there’s an undue widening of spreads, like what happened to Italy and the rest of the periphery in March and April. Oh, and by the way, do not expect any other policy changes on Thursday except more QE.

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