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ECB getting ready to cut and enlarge – Danske Bank

FXStreet (Córdoba) - Analysts from Danske Bank expect that the European Central Bank will lower the deposit rate and will also extend and enlarge the purchase program.

Key Quotes:

“A Reuters’ story on Wednesday fuelled further expectations that the ECB is preparing a deposit rate cut at the meeting next week and considering a two-tier deposit rate system as in Denmark and Switzerland, where the deposit rate is -75bp.

“The Danish experience shows that it is definitely possible and it benefits the banking system. However, it could create negative side effects in terms of a higher spread between the overnight rate and the lowest deposit rate and larger volatility in fixings.”

“For the EUR market, we would expect a smaller effect on the Eonia rate but it could result in a slightly higher spread to the lower deposit rate. However, as in Denmark, the key determinants would be (1) the spread between the two deposit rates, (2) the amount of excess liquidity and the fraction that can be placed at the two rates and (3) banks' willingness/ability to lend excess liquidity to each other (fragmentation).”

In our view, a clear sign that the ECB will cut deposit rates next week is that it has done nothing to talk against the market, which has been priced for a cut for some time now. On the contrary, signals have continued to be quite dovish from ECB president Mario Draghi and the ECB Chief Economist Peter Praet.”

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