ECB cutting the deposit rate further only likely in a much worse scenario

With headwinds for the euro area coming mainly from external demand, one option for the ECB would be to push for a weaker euro. 

While the trade elasticityis not what it used to be, a view shared by the ECB's Governing Council in its latest Accounts, it would require a major depreciation of the euro to create some positive momentum for exports in a world of weak demand, as brutally illustrated in Japan.

This suggests that quite extreme measures would be needed from the ECB. Many observers point to the drop in money market rates as a signal that the deposit rate could be cut further in the short term. 

Although the decline in market rates arguably is also reflecting high excess liquidity, a deeper negative deposit rate could have an impact on the exchange rate. But the little scope available is far from sufficient to achieve the big euro depreciation needed. 

"In fact, it could be argued that negative interest rates are somewhat superfluous for the euro area, given that QE already delivers downward pressure on the exchange rate while negative interest rates reduce the profitability of financial intermediation, possibly to the detriment of the real economy", says Societe Generale. 

While the ECB argues that the negative deposit rate complements QE, by increasing the velocity of money circulation (as holding cash is penalised), no other large central bank has pushed money market rates into negative yields. 

"In line with the ECB's assurances that rates have reached the "effective" lower bound, rather it would be expected that an accelerated QE programme as a first line of defence", added Societe Generale.