The Bank of England Signals No Intent to Cut Rates Below Zero
The main event yesterday was the Bank of England’s (BOE) interest rate decision and forward guidance. No one expected the central bank to signal anything at this meeting, but the forward guidance was nothing short of interesting.
The BOE held the rate at 0.1% with a unanimous vote. Also, it kept the corporate bond target and the asset purchase target at £20 billion, respectively at £875 billion. All these, again, were in the cards, but the market wanted to hear the bank’s results on its study regarding the introduction of negative rates in the kingdom.
A while ago, the central bank created intense volatility on the GBP pairs when it announced the start of such research. Yesterday, it communicated the outcome and its intentions moving forward.
GBP Higher Across the Board on the BOE’s MessageCopy link to section
The BOE’s message covered multiple areas of the U.K. economy, such as the Gross Domestic Product (GDP) growth projections, but, as mentioned, the market wanted to hear about negative rates. The bank did not disappoint – it announced that it has no intentions of introducing negative rates at this point, but it is preparing the infrastructure to be ready, should it be the case to use it in the future.
Unsurprisingly, the GBP pairs jumped across the board. All pairs outperformed, as the pound benefited from the shift in the BOE’s tone. As such, the GBPUSD jumped close to 1.37, the GBPCHF traded well above 1.23, and the EURGBP broke decisively below 0.88.
The BOE also acknowledged the fragile position the economy is. The hope that the vaccination efforts will pay results is seen in the U.K.’s economic projections. Should the pandemic linger some more, the projections are likely to be revised to the downside.
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Back to the negative rates, the bank signaled that zero rates are more appropriate than negative ones. At least from an operational point of view, the BOE appears to favor keeping the rate to zero rather than taking a chance and moving it to negative. It also suggested that even if that would be required, the infrastructure needed is not in place at this point.
The pound took as hawkish as it could. Moving toward the close of the trading week, it remains to be seen if the GBP pairs can hold onto their gains. As the dollar rallied all week, we may see some changes once Friday’s closing comes near.