Tenreyro Calls For Negative Rates
The prospect of negative rates in the UK has grown more likely this week in the wake of comments made by Bank of England policymaker Silvana Tenreyro. In an online speech given this week, Tenreyro urged the BOE to cut rates into negative territory arguing that it would be a significant boost in helping the economy survive and recover from the disruption caused by the pandemic.
Rates in the UK are currently at historical lows of 0.1%. Last year, the BOE was seen mulling over the use of negative rates, confirming that it had been undertaking discussions regarding their implementation and likely impact. The Bank went as far as contacting regional banks to ascertain how negative rates might impact their business and if they could handle the pressure of negative rates.
Despite the discussions, the bank has, up to now, refrained from utilising this tool and has instead been providing further monetary policy easing via increased asset purchases. However, with the pandemic spiralling now and the country back in a full nationwide lockdown until at least the end of February, there is a clear economic threat that must be dealt with.
Commenting on the use of negative rates, Tenreyro said: “My overall assessment is that, while we can never have complete certainty, negative interest rates should with high likelihood boost UK growth and inflation. Cutting bank rate to its record low of 0.1% has helped loosen lending conditions relative to the counterfactual, and I believe further cuts would continue to provide stimulus.”
Tenreyro’s comments come amidst increased expectations that the UK will suffer a double-dip recession for the first time since 1970 as a result of the lockdowns which returned in Q4 and have now been extended and enhanced over Q1 2021. Many investment banks have now cut their growth forecasts for the UK over Q4 and Q1.
Bailey Warns of Risks
However, despite the severe threat facing the economy, negative rates are not a done deal. BOE governor Andrew Bailey was keen this week to highlight the risks around negative rates, saying that although there is nothing to stop the bank employing them, there are a lot of issues with them such as the impact on regional bank profitability and the implications this can have for business and consumer lending. Traders now look ahead to the next BOE meeting on February 4th, with risks clearly skewed to the downside.
GBPUSD is pushing higher within the bull channel which formed from the 2020 lows. Price is now trading back above the 1.3516 level, having found further support there, and is now approaching the 1.3747 level. Above there, the next resistance to note is the 1.3989 level.
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