BoE quick take: negative rates on the table hit cable

Sterling dropped sharply along with gilt yields, with GBPUSD down one big figure to take a 1.28 handle and 2-year gilt yields dropping to -0.1% after the Bank of England delivered a dovish statement which included overt references to introducing negative rates.

It looks like Bailey is prepared to go big and fast if there is an unemployment crisis once the furlough scheme ends. For the time being he is keeping his powder dry.

Whilst the MPC kept rates on hold at 0.1% and the stock of asset purchases at £745bn, it looks like it is on the cusp of delivery further accommodation. The Bank ‘stands ready’ to do more, it said, adding that will not tighten monetary policy until there is ‘clear evidence’ of achieving its 2% inflation target in a sustainable way.

But it was the mention of negative rates that seems to led to sterling being offered.

Bank of England puts negative rates on the table

The bit that did the damage was included right at the bottom (underlines my own):

‘The Committee had discussed its policy toolkit, and the effectiveness of negative policy rates in particular, in the August Monetary Policy Report, in light of the decline in global equilibrium interest rates over a number of years. Subsequently, the MPC had been briefed on the Bank of England’s plans to explore how a negative Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates. The Bank of England and the Prudential Regulation Authority will begin structured engagement on the operational considerations in 2020 Q4.

It also set the stage for more QE, with the MPC noting that the Bank ‘stood ready to increase the pace of purchases to ensure the effective transmission of monetary policy’. With the current QE ammo due to run out by the end of the year, the Bank looks likely to expand the asset purchase programme by around £100bn in November.

We can now also start to worry about negative rates being implemented – a lot will depend on the unemployment rate as we head towards Dec with the furlough scheme ending.

On the economy, the Bank thinks the UK economy in Q3 will be 7% below Q4 2019 levels, which is not as bad as previously forecast. Inflation is forecast to remain below 1% until next year.

Chart: Cable breaches near-term trend but tries to find support at 1.29.

Looking to see whether this move reasserts the longer-term downtrend – lots depends on the Brexit chatter taking place in the background.