The last rate meeting was about one thing. Would the bank walk towards or walk away from using negative interest rates?
Since the start of the year, Governor Bailey’s comments has been gently walking back market expectation from the Bank using negative interest rates. One aspect helping that narrative has been that the UK has managed to avoid a ‘no-deal’ Brexit. This fact was referred to in the latest MPC (Monetary Policy Committee) minutes as a point to note. This must have helped the Bank of England breathe a sigh of relief.
The last BoE meeting
Last week the Bank of England further confirmed their unwillingness to use negative interest rates. The reaction in the UK 10 year bond yield chart was telling. The bond yields shot higher as bond traders started to further price out any remaining expectations of the Bank of England using negative rates. Look at the reaction in yields here.
Didn’t the bank prepare to use negative interest rates?
Yes, but in name only. Although the Bank of England announced preparations for PRA regulated firms to implement a negative bank rate the bank made it clear this was ‘not a signal about the future path of monetary policy’. This was about a structural /procedural possibility rather than a policy reality.
The GBP was supported out of the meeting as the MPC, as well as being perceived to be walking back from negative rates, they had a ‘materially stronger than expected’ view on growth. You can read that sentence here in the Bank’s report.
Bond purchases and interest rates
Bond purchases were unchanged and interest rates kept at 0.1%. One point to note is that the bank remains uncertain with regard to the true UK employment picture. The UK Government has cushioned any blow to Uk employment via the furlough scheme. However, the true state of the UK labour market is still a little vague to the Bank of England. A better than expected labour market reality will further support the GBP going forward.
Any hikes in interest rates are only set to come when there is ‘clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably’.
Negative interest rates are now a tail risk for the Bank of England rather than the base case. This is supportive for the GBP.