The deposit guarantee gives value to bank credit which causes inflation and reduces the value of cash

Deposit insurance causes inflation.

If deposits are guaranteed then there is never a reason to fear a bank run and customers will always leave their money on deposit. This means that the banks cannot go bust in the conventional sense which results in price inflation because the value of bank credit is (mandated to be) equivalent to that of cash. The deposit guarantee gives bank credit value and subsequently reduces the value of existing notes and coins, there is less premium in holding cash as a result.