Given the turnaround in the ECB's view on deposit rate cuts, we expect a 10bp cut together with a strong signal that further deposit cuts are on the table. We believe the ECB will reintroduce its old forward guidance, stating that it expects policy rates to stay at present or lower levels for a long time.
The main reason we expect the ECB to deliver a deposit rate cut is the strong signal from Draghi, that this is being considered. He has more or less cornered the hawkish ECB members again and pre-announced additional easing.
The deposit rate cut also has some benefits related to the impact on inflation, as it - on the margin - should be more euro negative compared with changes to the QE programme.
We believe a cut, together with an open door for further rate cuts, should give lower nominal yields further out on the curve. We expect real yields to fall even more, as the relatively aggressive easing should support inflation expectations.
The ECB is looking at other central banks' experiences of negative rates. This is likely to include Danmarks Nationalbank, which was forced to cut the key policy rate to -75bp in February this year to fend off appreciation pressure on the DKK.
The Danish policy rate has not been fully passed through to short-term money market rates and banks have exempted household deposit accounts from negative rates, while large corporations in general pay interest on bank deposits.
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