BOE Moving Closer To Negative Rates

There has been much speculation over recent months regarding the prospect of negative rates in the UK. The BOE has hinted at their use, discussed openly the consultations it has held around their practical use and then seemingly back pedalled on the likelihood of them being used. BOE’s Bailey recently said that while the bank had discussed using negative rates it was not expecting to employ them in the near term. However, with the economic outlook in the UK deteriorating as COVID once again rears its ugly head, the BOE has this week given its clearest signal that negative rates could soon be coming to the UK.

BOE Asks Regional Lenders How They Would Handle Negative Rates

The BOE has written to regional lenders in the UK this week to ascertain how individual banks would deal with rates moving below zero. Sam Woods, one of the BOE’s deputy governors addressed regional lenders in a letter this week saying: “For a negative bank rate to be effective as a policy tool, the financial sector – as the key transmission mechanism of monetary policy – would need to be operationally ready to implement it in a way that does not adversely affect the safety and soundness of firms.” The letter went on to say: “As part of this work, we are requesting specific information about your firm’s current readiness to deal with a zero bank rate, a negative bank rate, or a tiered system of reserves remuneration – and the steps that you would need to take to prepare for the implementation of these.”

Labour Market Outlook Worsening

Headline rates in the UK are currently sitting at record lows of 0.10%. However, with the UK PM announcing fresh lockdown measures this week as the daily death toll rose above 100 for the first time since June, the BOE is clearly looking to do more. The need for further easing was made more urgent this week with the latest UK economic data showing that the unemployment rate rose back to a three year high over the last 3 months along with a record increase in the number of redundancies.

With the UK government’s furlough scheme winding down now, there is expected to be a huge wave of job losses over the coming months which will no doubt be exacerbated by the return of local lockdowns and the looming threat of a further national lockdown if the spread of COVID is not contained.

Woods has given banks a November 12th deadline to respond, fuelling expectations that the BOE could look to cut rates at the December meeting ahead of the Christmas break. Woods concluded his letter saying: “We recognise that a negative policy rate could have wider implications for your firm’s business and your customers. The Bank and the prudential regulation authority will consider the wider business implications, including on financial stability, safety and soundness of authorised firms and pass-through to the wider economy.”

Technical Views

GBPJPY (Bearish below 133.11)

From a technical viewpoint. The breakdown below the rising channel which framed the move off the year’s lows is now at risk of developing into a broader bearish move. Following the rally off the 133.11 support price is now potentially putting in a lower high against the peak above 142. If 133.11 is broken this will open the way for a move down to 130 next, signalling a strong bearish reversal in the near term.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.