Another cut in the ECB deposit rate

Regarding rate cuts, the ECB has already depleted nearly all its options. As the refi rate is standing at 0.05%, only another cut in the deposit rate is possible. Currently, the deposit rate stands at -0.20% and another 10 bps cut should not be ruled out. We see such a move as quite unlikely however.

A cut in the deposit rate would punish banks in general because of the excess liquidity that is already flowing around in the system. This itself is a result of the ECB's asset purchases and the four TLTRO's that have been executed up to now. Moreover, this burden on the banking system is only expected to increase, given that asset purchases will continue and another four TLTRO's will be conducted before September 2016.

Moreover, it also won't help in broadening the scope of the ECB's asset purchases. After a Grexit, there will be a flight to liquid and safe assets. An increasing part of the sovereign bond spectrum will trade in sub-deposit rate territory, meaning that those bonds become ineligible for the ECB's asset purchases. A 10bps cut in the deposit rate should then, in theory, re-open these segments of the market. 

"However, such a rate move would likely lower the entire yield curve by approximately 10bps as well. Cutting the deposit rate is thus not an appropriate solution for this potential problem", states Rabobank.