Taking place amid the US election drama it was easy to miss this meeting. The Bank of England met last week on November 05. They kept interest rates unchanged at 0.10% at their last meeting as expected. However, the surprise was that they increased their asset purchases by a greater level than expected.

Expanded asset purchases

The asset purchase levels were increased by £150 bln vs the £100bln expected. The normal reaction to rising QE levels would be a weakening of the GBP. However, out of the meeting the pound rose. Why? This was due to a sentence from the Bank of England on negative interest rates. The sentence referring to negative interest rates was that the Bank of England said that ‘participants attach some weight to the possibility of a negative bank rate’. Investors had been hoping for a more definite move towards negative rates. This showed that the BoE was not committing to them. However, given the fact that the BoE has asked commercial banks to report back to them on the profitability on negative rates they would most likely wait to hear back from them before deciding on negative rates one way or the other. The deadline for hearing back was after the last meeting, so it does make sense why the BoE was pretty neutral at their last meeting.

Chief Economist neutral on rates

Furthermore, the Chief Economist, Andy Haldane is not overly keen on negative rates and this makes sense as their value is far from clear. Other central banks that have used them have not reported back great gains. It also creates administrative difficulties as certain accounts will be liable for negative rates, while other accounts won’t. It is a very hard sell to start charging domestic savings for negative interest rates. Many people would simply stop depositing money in the bank.

The main point

It was the Indifference on negative interest rates last week that caused the GBP to rise. The trigger for a sentiment shift on the GBP in terms of monetary policy will factor around the willingness for the BoE to use negative rates:

  • If the path to negative interest rates is opened up, expect GBP weakness.
  • If the path to negative interest rates is blocked, expect GBP strength.