LONDON (Reuters) - Financial markets are primed for the European Central Bank to launch a quantitative easing programme on Thursday in an attempt to revive the moribund euro zone economy and inflation.
The following shows how markets are set up for the meeting, key factors to watch, and possible consequences:
How much new money will the ECB print? Money market traders polled by Reuters expect a 600 billion euro (460 billion pounds) sovereign bond-buying programme.
A day before the meeting, media reports said the ECB would buy bonds worth 50 billion euros a month, with one saying purchases would last a year and another that it would extend from March to the end of 2016.
If true, these would suggest total purchases of between 500 billion and just over 1 trillion euros. "500 billion will be slightly disappointing ... (and) 1 trillion euros will be bullish," Deutsche Bank co-CEO Anshu Jain said on Wednesday.
But investors believe 600 billion euros will not be enough to bring inflation back to the central bank's target of just below 2 percent. Market inflation expectations are at record lows and reflect scepticism QE will work.
A surprisingly big or even open-ended programme, such as that announced by the Bank of Japan in October, would give further impetus to buying of peripheral euro zone bonds and cut their yield premiums over German Bunds. For a graphic on central bank balance sheets, click link.reuters.com/fus62t
Economists polled by Reuters put the probability an announcement on QE will come this week at a median 70 percent, slightly less than the 90 percent money market traders are pricing in.
Yields on top-rated euro zone government bonds with maturities up to six years have fallen below zero as investors have snapped up paper in the hope that they will be able to sell it to the central bank for a profit.
Delaying the decision could cause a massive market upheaval, especially as Greece holds a general election on Jan. 25 that has raised fresh concern about its future in the euro zone.
Investors have snapped up euro zone government bonds across the credit spectrum, driving yields to record lows and, for most short-dated top-rated paper, further below zero.
But heading into the meeting, yields rose as investors cut exposure to the bonds after the reports on the extent of ECB purchases. German 10-year Bund yields, which had fallen steadily throughout 2014, rose further on Thursday after notching up on Wednesday their biggest daily rise since December 2013.
In currency markets, traders and strategists at major banks say the sort of extended monthly buying outlined in the media reports is fully priced into the euro. That argues for a clearing out of many of the bets on the euro weakening against the dollar that have made money for investors over the past six months, and the single currency rose almost a cent on Wednesday.
There is major uncertainty over how the scheme will work, with the main focus on whether individual national central banks will buy their own countries' bonds and bear the brunt of credit risks in a nod to German moral hazard concerns.
This could prompt investors to cut exposure to peripheral euro zone bonds and boost demand for top-rated, more liquid assets. Peripheral bond yields are likely to rise from their record lows and widen their premiums to Bunds.
Speculation is high that the ECB may exclude junk-rated Greek bonds from its purchases as the country heads into an election that could put it at odds with its international creditors and spark a fresh crisis.
Greece triggered the currency bloc's debt crisis in 2009, which saw the country shut out of bond markets. Any exclusion of its bonds from QE could send its borrowing costs spiralling back up to unsustainably high levels that could trigger another default.
Trade in Greek stocks and bonds could be even more volatile in the run-up to Sunday's vote. It would also be bad news for the country's recently upgraded credit rating, the main ratings agencies said.
Compiled by Emelia Sithole-Matarise; Graphic by Vincent Flasseur; Editing by Catherine Evans