Traders are betting that the Bank of England introduces negative interest rates for the first time ever, pushing the pound to a three-week low today.
Interest rate futures contracts from December dipped into negative territory today as the money markets speculated that British interest rates would fall below zero in the coming months.
Comments by Andy Haldane, the Bank of England’s chief economist, over the weekend fuelled speculation that Bank policymakers are not opposed to using that option.
“While we don’t think that negative interest rates are a near term possibility as the central bank has a few more bullets left, Haldane’s comments opens the door to that possibility,” said Lee Hardman, an FX strategist at MUFG.
The Bank is looking at options such as negative interest rates and buying riskier assets to prop up the UK’s economy as it slides into a deep coronavirus-driven recession, Haldane was quoted as saying in the Telegraph over the weekend.
The economy is weaker than a year ago…so in that sense it’s something we’ll need to look at — are looking at — with somewhat greater immediacy,” he said when asked if interest rates could dip below zero.
“You mention negative rates, but there are other options beyond that, or alongside that, that we’re looking at as well,” he added.
Bank officials have previously expressed objections to taking rates below zero – as the central banks of the eurozone and Japan have done – because it might hinder the ability of banks in Britain to lend and hurt rather than help the economy.
Last week the Bank’s governor Andrew Bailey said it would be unwise to rule anything out, “particularly in these circumstances,” in an online question and answer session with the Financial Times.
Yet he said: “It is not something we are currently planning for or contemplating.”
His comments come after deputy governor Ben Broadbent said the Bank was open-minded about its next steps. He said of negative interest rates: “These are the balanced questions the committee has to think about.”
With the BoE’s benchmark at an all-time low of 0.1 per cent and Britain facing potentially its sharpest economic downturn in 300 years, talk of the once unimaginable step of cutting rates to below zero has resurfaced.