News & analysis

The MPC has further vindicated mounting bets by investors that it will be forced to implement negative interest rates at some point in the next 12 months, in an otherwise ordinary statement and meeting minutes.

Policy was kept unchanged in a 9-0 vote, and QE was kept unchanged although the Committee has kept the door open to expanding purchases at the end of the year. An optimistic tone was maintained by members about consumer spending, possibly due to CHAPS spending data – which is seen only by the BoE.

The UK economy is enjoying a fairly solid economic upswing at the moment, but increasing anticipation of negative rates in financial markets, and now increasing discussion of the issue at the MPC, highlight the extent to which everyone knows the economy is not out of the woods just yet.

With no-deal Brexit (now re-branded as an “Australia-style” trade arrangement) once again looming as an economic risk, and global equilibrium interest rates in a seemingly inexorable decline, negative rates are increasingly being seen as a plausible outcome for the UK. Perhaps counter-intuitively, the fact that the UK economy is recovering faster than expected is not incompatible with the MPC eyeing negative rates. As the August Monetary Policy Report made clear, the MPC believe negative rates are best used during times when banks are less concerned about balance sheet risks – such as during a recovery.

August’s MPR also made it clear that the MPC believed the two biggest issues with negative rates were possible negative effects on sentiment – because they are unusual – and transmission through the banking sector.

Both risks would need to be addressed, and would presumably involve some communications effort of the sort Andrew Bailey has said would be necessary before implementing negative rates. As such, it looks like the MPC is opening the door to negative rates, but remains far from being ready to pull the trigger.

Sterling has taken another knock on the news, compounding woes from the latest rash of Brexit developments. As always, the safest assumption seems to be that if trade talks collapse and the UK heads for a disruptive end to the transition period, further losses will materialise for the pound.

 

OIS pricing indicates rising expectations of a cut to negative in 2021

 

OIS pricing indicates rising expectations of a cut to negative in 2021

 

1y1y OIS forward plunges to lowest on record as markets increasingly bet on negative rates

 

Author: Ranko Berich, Head of Market Analysis

 

 

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