Importantly, economists expect the easing to be the end of the easing cycle, although it is believed the ECB will signal it is ready to cut the deposit rate further. This is because economists expect the recovery to gain momentum in 2016, implying the unemployment rate should approach its structural level and eventually put upward pressure on inflation. However, euro appreciation pressure will remain a challenge for the ECB and for inflation to go up.
"We have changed our view and now expect a deposit rate cut of 20bp versus our previous expectation of a 10bp cut. We have changed our view because (1) none of the ECB members have argued that pricing of more than a 10bp deposit cut seems aggressive and most ECB members have supported the willingness to act strongly at the December meeting, (2) a Reuters article claiming the ECB is considering a two-tiered deposit rate system suggests the ECB is considering a larger deposit rate cut and (3) before these changes, we had already seen the risk as skewed towards the ECB cutting more aggressively in an attempt to send a strong signal of commitment to comply with its inflation mandate", says Danske Bank.
"We expect a 20bp deposit rate cut to be accompanied by a two-tier deposit rate system, with banks charged a different deposit rate depending on the level of excess liquidity deposited with the ECB. The benefit of such a system would be that banks' profitability would be hurt less by the more negative deposit rate as some of the liquidity would be placed at a higher deposit rate. Moreover, the risk of cash hoarding would be less, as the risk of banks passing on the negative rate to retail customers is lower when banks' costs are lower. Denmark, where certificates of deposit are at -75bp, has a twotiered deposit rate system. "added Danske Bank.