Pound sterling jumped against the US dollar and the euro this afternoon as comments from the Bank of England’s governor Andrew Bailey on the viability of negative interest rates dampened some expectations of sub-zero rates in the UK.
Governor Andrew Bailey said there were “lots of issues” with cutting interest rates below zero and such a move could hurt banks.
Sterling, already benefiting from improved risk appetite, rose 0.9 per cent above $1.363 on the back of Bailey’s comments.
Against the euro, the pound rose 0.6 per cent to €1.116, its highest level against the single currency since 27 December.
Market pricing shows investors expect negative rates from Britain’s central bank as early as May. Those expectations were pushed slightly further out after Bailey’s comments.
“There were some expectations in the market that the BoE could soon move in this direction (of negative rates),” said Neil Jones, head of FX sales at Mizuho Bank.
“These headline comments have a put a dampener on negative rate expectations and participants are buying sterling back.”
Jane Foley, head of FX strategy at Rabobank said the difficulties involved with implementing negative rates are obvious to the market and that it would be a last resort for the central bank.
“The BoE has been quite successful in making the money market fear negative rates without having to implement them,” she said.
In a daily note to clients, strategists at ING Bank said they remained reluctant to forecast negative rates by the BoE.
With Brexit largely in the pound’s rear-view mirror, investors are focusing more intently on Britain’s economy, which looks likely to tip back into recession.
GDP shrank in the final quarter of 2020 and is expected to contract again in the first quarter of 2021 – following a record fall of over 20 per cent in output in the first two months of lockdown last year.
Finance minister Rishi Sunak warned on Monday that Britain’s economy would get worse before it got better, with the country now in its third national lockdown and struggling to contain the spread of the coronavirus.
British consumer spending fell in December at the fastest rate in six months, with pubs and restaurants especially hard hit by a resurgence of coronavirus cases, a survey by payment card provider Barclaycard showed.