Markets are pricing in a "significant chance" of the Bank of England introducing negative interest rates

 
Jake Cordell
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There is a one in six chance of interest rates being cut below zero
There is a one in six chance of interest rates being cut below zero (Source: Getty)

Markets are pricing in a 15 per cent chance of the Bank of England slashing interest rates below zero as financial markets continue to wobble after the UK's historic vote to leave the EU last week.

As trading was suspended on banking shares after another day of double-digit falls, the market outlook on the future path of interest rates headed south.

Markets are now fully pricing in at least one cut to interest rates — which have been at their lowest level in the Bank's 300-year history of 0.5 per cent since March 2009 — before the end of the year. That is despite all three major ratings agencies cutting their outlook on the UK's gold standard credit rating.

Analysis by traders Hargreaves Lansdown showed markets are also putting the chances of Mark Carney cutting interest rates into negative territory at one in six. Carney has previously been dismissive of the idea of negative rates, but did warn a sharp depreciation in the value of sterling following a vote to Leave would create a difficult decision for the bank.

Brexit Britain: What you need to know

A weaker pound could see inflation jump above the Bank's two per cent target fairly quickly, while financial instability may result in higher unemployment and weaker growth.

"The Brexit vote has substantially moved the dial on interest rate expectations, with markets now pricing in a significant chance of rates going negative in the UK," said Laith Khalaf, senior analyst at Hargreaves Lansdown.

"The Bank of England may soon find itself between a rock and a hard place ... This raises the uncomfortable prospect for the central bank of cutting interest rates while inflation is rising, something it has proved it is willing to do in the past in order to boost the economy."

If the UK were to cut interest rates below zero it would join two of the world's other major central banks — the European Central Bank (ECB) and the Bank of Japan (BoJ).

The rush to safe havens from investors in the wake of the vote pushed the yield on 10-year UK government bonds to a new record low of 0.95 per cent — the first time it has ever been below one per cent.

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