What Triggered BOE to Use Negative Rates? 

 The Bank of England’s preparations for the aftermath of a potentially messy Brexit could include a new weapon by the end of the year.  

Policy makers say they’ll work with bank regulators on how they might implement such a policy for the first time in the central bank’s history. A failure by the U.K. government to reach a trade deal with the European Union by the end of this year could tip them over the edge.  

They’re saying “You’ve got to get your ducks in a row because we may be forced to use it,” said Cathal Kennedy, an economist at Royal Bank of Canada. “They’ve come an awfully long way in a short space of time.”  

Governor Andrew Bailey, over a month ago, emphasized that there were no plans to follow most of Europe and Japan with negative rates – comes amid an increased likelihood of a chaotic end to the post-Brexit transition.  

Prime minister Boris Jonhson’s move to renege on the withdrawal agreement with the EU threatens to cupper talks on a new trade accord with the bloc.  

Such an outcome would add a new dimension of pain to the economy through customs checks, tariffs and higher costs for businesses.  

The U.K. government is already dealing with the ordeals of coronavirus infections, fresh social restrictions to counter them, and fears that unemployment could spike when government support for wages is withdrawn next month. All that would be compounded by a disruptive Brexit, according to Goldman Sachs Group Inc. 

The BOE’s main immediate policy tool will likely be bond purchases, with economists forecasting an expansion later this year. But the chance of negative rates in 2021 is rising. U.K. two-year bond yields, those most sensitive to rate-cut speculation, declined Thursday for the first time in four days. 

“It’s becoming increasingly likely that if the economy is blown off course next year, the central bank could employ sub-zero rates.”  -Dan Hanson.  

The prospect put British banks on alert. A foray below zero would further drag down net interest margins and squeeze the supply of the riskiest mortgages, denting house prices and consumer confidence, said Bloomberg Intelligence’s Jonathan Tyce. 

One of the reasons why BOE resisted considering the negative rates is the pain that it will cause to the finance-sector balance sheets. The tool has had mixed success elsewhere, and Sweden opted to end its own experiment with the policy last year. 

BOE officials highlighted sub-zero borrowing costs even though the economy hasn’t been as weak as anticipated. But the risk that the recovery cold be undone means they’ve had to start looking hard at a previously unthinkable measure. 

Thomas Costerg, senior economist at Pictet Wealth Management in Geneva, says a messy Brexit is the only thing that would make the BOE likely to pull the trigger on negative rates. For HSBC Holdings, it’s the difference between no easing at all and a stimulus package of cutting rates to zero and an additional 100 billion pounds ($130 billion) in bond purchases. 

Bank of America Crop economists see a rate cut to zero in February, but a collapse of EU trade talks could prompt the U.K. central bank to go even further. 

TECHNICAL OUTLOOK 

 

On the daily charts of GBP/USD, the price opened at 1.2974. The dollar is edging down against the GBP despite Brexit concerns and the negative data from the Fed also boosted the outlook of the sterling’s performance. 

The Bank of England (BOE) announced its own policy decision on Thursday, dangling the possibility of negative interest rates to counter rising number of COVID-19 cases, higher unemployment and the possibility of a hard Brexit. 

However, European Commission President Ursula Von Der Leyen indicating that she was “convinced a trade deal with Britain was still possible” gave the pound a boost. 

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