In today’s Comment we will investigate whether or not the ECB will cut the deposit rate and if the central bank willalsotake mitigating measures to ease the pain for the banking system. Reasons for the ECB to ease further –including arate cut–are plenty. Anecdotal evidence, big data and nowcasts suggests the economic recovery in Eurozone started to stall (France) or slow (Germany) at the end of Q3. And with Europe still facing a rising second wave, the fourth quarter will probably be a disappointment with not much in the way of regaining output that was lost in March/April. Core inflation has sagged more than expected, reaching an all-time low of 0.4% in September. While the decline in core inflation is probably overstated because of idiosyncratic factors, markets are forcing the ECB’s hand. However, this time around it is not the FX market that is giving Lagarde & Co a headache. Instead, it’s the bond and money market.
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