Daily Insight
Group Economics Macro & Financial Markets Research
28 October 2015
ECB to cut deposit rate Nick Kounis Head Macro & Financial Markets Research Tel: +31 20 343 5618 nick.kounis@nl.abnamro.com
We now expect the ECB to cut its deposit rate by 10bp to -0.3%…
…while it should leave the door open for more
Swedish experience shows deeply negative rates can be effective
It would take a bigger than 10bp cut for the short end to rally further
Kim Liu Senior Fixed Income Strategist Tel: +31 20 343 4669 kim.liu@nl.abnamro.com
ECB likely to reduce deposit rate further Following last week’s ECB press conference, we now expect the central bank to cut its deposit rate further. This would be on top of the increase and extension of QE that was already in our base scenario. ECB President Draghi not only made it clear that more stimulus was on the cards, but also that a policy rate cut was also a possibility, something he had previously ruled out. Mr. Draghi would not have been so explicit if he did not think that a rate cut was very likely. We now expect a 10bp reduction in the deposit rate, which would take it to -0.3%. In addition, it seems likely that it will leave the door wide open to do more if necessary. This will depend crucially on whether EUR/USD remains at the lower level it has settled at since the press conference. One potential scenario is that if the FOMC signals a rate hike delay to 2016, that this could lead to renewed upward pressure on EUR/USD, adding to the case for the ECB to cut the deposit rate by more than currently expected. We also expect a 5bp cut in the refi rate, taking it to zero.
Swedish lessons for the ECB The ECB had previously announced that policy rates had reached the lower bound, and that further monetary stimulus would come solely from adjustments to its QE programmes. The Governing Council’s shift reflects the increased downside risks to inflation as well as the experience of other countries. For instance, since around the middle of last year, the Riksbank has reduced its deposit rate from 0% to -1.1%. What are the lessons of the Swedish experience? Deposit rate cuts drive down the currency The first clear lesson is that increasingly negative deposit rate has been successful in pushing down the currency (see chart below). The krona trade-weighted index has fallen by around 10% during the period of deposit rate cut from 0% to -1.1%. This is despite expectations of and actual QE in the eurozone over this period. So from this perspective, the policy has been successful.
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