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Respite for Pound Sterling after Bailey Pushes Back on Negative Interest Rates

- GBP relieved by Bailey comments
- Pushes back against -ve interest rates
- "I won't be buying Sterling" - Soc Gen's Juckes

Bailey

Andrew Bailey as Chief Executive of the Financial Conduct Authority © FCA

  • GBP/EUR spot: 1.0914 | GBP/USD spot: 1.2811
  • GBP/EUR bank rates: 1.0708 | GBP/USD bank rates: 1.2552
  • GBP/EUR specialist rates: 1.0816 | GBP/USD specialist rates: 1.2697
  • Learn more about market beating exchange rates, here

The Bank of England Governor Andrew Bailey has downplayed the prospect of negative interest rates in the future as he sought to downplay the market's rising expectations for future interest rate cuts, an intervention that appears to have offered some support to the British Pound.

Bailey said on Tuesday that negative interest rates have proven to be a "mixed bag" for those countries that have already introduced them.

He added such a move would "rightly puzzle the public" if they were introduced with no clear communication.

Last week the minutes of the MPC’s September meeting, which were released in conjunction with the Bank’s latest policy update once again drew attention to the possibility of UK interest rates moving into negative territory.

The Pound fell sharply on the revelation that the Bank would at some point in the fourth quarter of 2020 engage the banking regulator as part of their ongoing inquiry into whether negative interest rates were feasible in the UK.

The market read this as a sign that negative interest rates were likely to arrive in 2021.

However Bailey said the news that Bank was engaging the banking regulator on the matter should be no surprise, as they need to fully research the matter.

Indeed, Bailey says last week's revelations should not imply the Bank will use negative interest rates.

The market might therefore have been wrong-footed by the developments and might have been too hasty to sell the Pound as a result.

"Governor Bailey plays down the prospect of negative rates in the UK," says Viraj Patel, analyst at Arkera. "GBP rates market has got ahead of itself. BoE sees anything below current 0.1% as basically negative rates so either all or nothing (10bps cut makes little sense)."

BoE expectations and the Pound

Patel says expecting a higher GBP/EUR exchange rate is a better expression of the view that the Pound can recover on the view that markets have gotten ahead of themselves by expecting negative rates, particularly given the strong bid for the U.S. Dollar at present.

While the latest developments concerning Bank of England policy are on balance positive for the British Pound's outlook, it must be noted that at present there are numerous factors driving the currency, namely rising Brexit anxieties and fears of fresh economy-squeezing covid-19 restrictions.

The Pound-to-Euro exchange rate has nevertheless traded higher by 0.20% to quote at 1.0912 while the Pound-to-Dollar exchange rate has pared earlier losses to trade at 1.2803.

However, not all are convinced the Bank won't cut interest rates further.

"Andrew Baily, Bank of England Governor, drew parallels with Fed policy in a willingness to see inflation overshoot, and while he said the technical work on negative rates will take some time, he left the impression that when it's done, they will be implemented. Fed Chairman Powell's testimony reiterates the Fed's dovish position," says Kit Juckes, Head of Global FX Strategy at Société Générale.

"In a monetary policy race to the bottom, the Bank of England's willingness to cut rates below zero gives it an edge," adds Juckes. "I don't think there is benefit to the UK from an even weaker currency, but as long the MPC is heading that way, I won't be buying Sterling."

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