- BoE's Tenreyro signals desire for -ve interest rates
- Says could boost economy at a difficult time
- But GBP would struggle in -ve rates environment
- Broadbent comments in focus on Tuesday
Above: File image of Silvana Tenreyro. Image © UK Parliament, Pound Sterling Live.
- Market rates at publication: GBP/EUR: 1.1141 | GBP/USD: 1.3549
- Bank transfer rates: 1.0930 | 1.3270
- Specialist transfer rates: 1.1063 | 1.3453
- More about bank-beating exchange rates, here
A leading member of the Bank of England's Monetary Policy Committee has given a strong signal that negative interest rates in the UK are on their way, a development that could prove to be a significant headwind to the Pound in the fist half of 2021.
The British Pound's poor start to the year continued into a second week following a speech delivered by MPC member Silvana Tenreyro, who said she believed negative interest rates would be a positive development that can further aid the under-pressure UK economy.
In a virtual speech delivered to UWE Bristol Tenreyro said her 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 (of no policy change), and I believe further cuts would continue to provide stimulus," she added.
A number of foreign exchange analyst we follow say the Pound could be weighed down going forward should expectations for negative interest rates to be introduced by the Bank grow.
"The February 4 meeting of the Bank of England could be interesting. There is currently just 2 or 3 basis points of easing priced for that meeting but from talking to people, I would guess that as the meeting approaches, there will be increasingly speculation on the chances of a cut," says Brent Donnelly, Spot FX Trader at HSBC.
"I do believe... that negative interest rates would be a big enough domestic story to impact GBP. So mark February 4 on your calendar and think about reducing long GBP exposure as we get closer," adds Donnelly.
Above: the pound is 2021's worst performing major currency.
The Pound has endured a soft start to 2021, going lower against the Euro and other major currencies despite an EU-UK trade deal being struck on December 24, a development that many analysts had expected to prompt some gains in the UK currency.
But it appears that concerns for the UK economy have grown since the imposition of new UK-wide lockdowns, aimed at countering the spread of covid-19. Fears for further economic decline have simultaneously lead to rising expectations for a rate cut at the Bank of England.
The foreign exchange playbook says when a central bank signals it is to cut interest rates, the currency it issues declines in value. Foreign investors buy Sterling to invest in UK money markets, but lower interest rates at the Bank of England in turn lower the return in those money markets, potentially leading foreign investors to withdraw their investments or divert future investments elsewhere.
Chris Turner, Global Head of Markets at ING Bank says the Pound faces a threat from negative rates.
"GBP will have to brace itself for another wave of negative rate headlines," says Turner, "GBP will be vulnerable to negative rate talk during lock-downs and EUR/GBP risks 0.91."
EUR/GBP at 0.91 equates to a Pound-to-Euro exchange rate of 1.0990.
GBP/EUR Forecasts 2021
Period: Q2 2021 Onwards
GBP/USD Forecasts 2021
Period: Q2 2021 Onwards
Tenreyro said the Bank of England was still talking to financial firms such as banks as to how negative interest rates would operate and impact on them, and the outcome of those talks would be made known in due course.
However, the outcome of the discussions appear to be something of a foregone conclusion in Tenreyro's mind: "Once the Bank is satisfied that negative rates are feasible, then the MPC would face a separate decision over whether they are the optimal tool to use to meet the inflation target given circumstances at the time."
Turner's colleague at ING, Francesco Pesole says the concerning covid-19 picture in the UK may have taken a toll on sentiment towards the Pound, "as it both fuelled fears of a slower economic recovery and of a more dovish Bank of England."
However, for some economists an interest rate cut is not a foregone conclusion.
"We do not expect the BoE to cut Bank Rate in February. Banks do not seem ready and some rate setters argue negative rates could be counterproductive when GDP is falling," says Robert Wood, UK Economist at Bank of America.
Instead of cutting interest rates, Wood expects the Bank to conclude the negative rates review by cutting the lower bound negative, strengthen forward guidance, extend quantitative easing either explicitly (£100BN till mid-2022), implicitly (more open ended quantitative easing), or guide to a probable extension later.
If Wood is correct then the Pound could benefit as the market erases some of its earlier expectations for negative interest rates.
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Ultimately the decisions taken by the Bank of England will depend on the course of the covid-19 pandemic and the subsequent vaccination programme.
Vaccine rollout will accelerate markedly this week as the UK government brings a number of major regional vaccination centres online, while saying further hospital hubs and GP practices will also start distributing vaccines this week.
In a paper released on Monday, the UK Government explained how they would deliver their vaccination target, saying their top priority is to offer a CovidD-19 vaccine to everyone in the most vulnerable categories by 15 February.
A growing network of vaccination sites will rapidly expand in the days and weeks ahead.
Currently, 96% of the population in England is within 10 miles of a vaccine service.
It is planned that by the end of January everyone will live within 10 miles of a vaccination centre and up to 2 million vaccines will be delivered per week.
Should the vaccination programme go as planned the Bank of England might opt to hold back on cutting interest rates, or signalling a cut to interest rates, at the February 04 meeting, in the expectation that the economy would soon recover.
This would likely be a positive development for Sterling.
Broadbent Comments in Focus Tuesday
Tenreyro is considered by a number of analysts to be a 'dove' i.e. she is in favour of more accomadative monetary policy, via interest rate cuts or expanded quantitative easing.
As such, that she is in favour of cutting interest rates might be of little surprise to many market participants.
Ben Broadbent, another members of the Bank's MPC, will add his views on Tuesday.
"Tenreyro’s probable support for negative rates was unsurprising as it is consistent with previous comments. In contrast Broadbent has in the past pointed out the downside of such a move and in particular its potential negative impact on the banking sector," says Rhys Herbert, an economist at Lloyds Bank.
"As a permanent BoE employee his views may be seen as closer to the official position and so it will be interesting to see whether he has anything new to add today. His assessment of the economic impact of the latest restrictions will also be followed closely," adds Herbert.