UBS Forecasts QE in March With Euro, German Bond Yields Slumping

The euro will fall to 2003 levels and German bund yields will tumble after the European Central Bank announces a plan to buy euro-area government bonds in March, UBS Group AG forecasts.

In a reversal of its earlier prediction, Switzerland’s biggest bank said a deterioration in the 18-nation euro area’s inflation outlook will lead the ECB to purchase 1 trillion euros ($1.23 trillion) of sovereign bonds over two years to boost the region’s economy. The announcement will come after the ECB Governing Council’s meeting on March 5 as resistance to widening stimulus remains strong among some officials, economists led by Reinhard Cluse wrote in a report dated today.

“The first condition -– a further decline in the inflation outlook –- will be triggered and push the ECB to take further policy action,” the strategists wrote. “Specifically, a widening of QE will include the purchase of sovereign debt, against ongoing, but ultimately dwindling, political resistance.”

The shared currency will weaken to $1.15 by the end of 2015, 10-year bund rates will drop to 0.50 percent after the announcement and the yield spreads with Italian and Spanish 10-year securities will narrow, the report said.

Oil prices, which have tumbled 36 percent this year and reached the least since 2009, will keep inflation “extremely low” in the euro area and expectations for future consumer-price growth will fall further, the report said.

The central bank meets in Frankfurt tomorrow for its next policy decision.

The euro fell 0.5 percent to $1.2324 at 12:26 p.m. London time after reaching $1.2321, the least since August 2012. German 10-year yields were at 0.75 percent having slid to a record-low 0.69 percent on Dec. 1.

The five-year, five-year forward inflation swap rate, a market metric identified by ECB President Mario Draghi as a benchmark for the euro area’s inflation outlook, closed at a record-low 1.7225 percent on Oct. 15. Inflation has remained below the ECB’s goal of just under 2 percent since September.

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