Bank of England Preview: Bailey set to abandon negative rates, injecting sterling with new energy

The BOE is set to leave its policy unchanged on "Super Thursday."
Sterling has room to rise if Governor Bailey abandons negative rates.
The bank will likely highlight Britain's robust vaccination campaign and successful furlough scheme.

Yohay Elam FXStreet

"Two wrongs don't make a right" goes the saying that may be useful in life – but in sterling's case, saying no to negative interest rates may certainly be the right thing for pound bulls. The Bank of England is set to conclude its review of the topic and potentially rule it out for now.

The specter of sub-zero borrowing costs has been weighing on the currency since last summer when BOE Governor Andrew Bailey began flirting with the idea after slashing rates to the historic low of 0.10%.

The bank also substantially expanded its bond-buying scheme in response to the coronavirus crisis, but that has had a positive effect on sterling – printing money has been seen as supporting more government spending and the economy, rather than devaluation. This program is set to remain unchanged at this juncture.

Bailey and his colleagues publish their Monetary Policy Report in addition to the rate decision, making this Thursday "super." Apart from commenting on negative rates, they are set to discuss the current state of the economy – and the tone is set to be upbeat.

Britain's most recent jobs report has shown that the Unemployment Rate is only at 5% – showcasing the successful furlough scheme enacted to keep workers attached to their employers. The government made good use of funding provided by the BOE.

The labor market is coping well with the crisis:

Source: FXStreet

Looking beyond the recent past and into the future, Britain's rapid vaccination scheme provides hopes for accelerated growth down the line. The UK has already reached immunized around 14% of its population, the highest in the West.

The most recent development on that front has been the conclusion that stretching the time between the first and second jabs from one to three months is more efficacious. That allows reaching more people and coming out of the crisis faster than previously thought.

Source: OurWorldInData

More: Coronavirus: Statistics, herd immunity, vaccine calendar and impact on financial markets and currencies

What are the downside risks? On the medical front, the new covid variants may prove resistant to vaccines and slow the recovery. The BOE may highlight uncertainty and remain cautious – but it does not have more insights than the medical experts.

However, Governor Bailey may warn about the implications of Brexit. While many see the UK's vaccination success and Europe's miserable campaign as vindicating the exit from the EU, barriers to trade may undermine the recovery. Will the bank provide insights on this topic? That is probably the sole issue that could limit gains from the BOE's decision optimism.

Conclusion

The BOE is set to leave its policy unchanged and put an end to speculation about negative rates, boosting sterling. Upbeat economic data and optimism about vaccines are set to outweigh concerns about Brexit.

GBP/USD Price Forecast 2021: Cable braces for calendar comeback amid three exits

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

GBP/USD flirts with weekly highs in the Fed's aftermath

GBP/USD reversed early losses following the Federal Reserve decision to keep rates on hold and neared the 1.3360 level before shedding some ground. Focus shifts to Governor Kevin Warsh's speech, while the Bank of England will announce its monetary policy decision on Thursday.

EUR/USD extends rally pass 1.1450 on Fed's Warsh

EUR/USD trades at fresh weekly highs above 1.1450, following the Federal Reserve monetary policy decision to keep interest rates on hold. The statement showed policymakers remain confident in economic progress while blaming inflation on energy prices. The divided vote among officials put in doubt a September hike, leading to sharp US Dollar losses.

Gold hovers around $4,100 as Fed decision hits the USD

Gold surged following the Federal Reserve's decision to keep the benchmark interest rate unchanged at 3.50%-3.75%. Policymakers noted that inflation remains elevated and that economic activity is expanding at a solid pace despite elevated uncertainty, spurring doubts about a rate hike in September. XAU/USD peaked above $4,100, now battling to retain the level.

No soft target: Warsh vows to return inflation to 2%

The Fed left interest rates unchanged at 3.50%-3.75%, but the decision carried a distinctly hawkish edge as three officials voted for an immediate 25-basis-point increase. Chair Kevin Warsh reinforced that message, insisting there was no tolerance for a softer inflation target and warning that the Fed would not hesitate to act.

How the CLARITY Act unlocks Wall Street’s tokenization pipeline

The United States (US) Digital Asset Market Clarity Act (CLARITY Act), awaiting a full Senate floor vote, promises to unlock Wall Street’s potential to tokenize financial assets, including equities, US Treasuries, private credit, real estate and commodities at a scale that could supercharge the real-world asset (RWA) market from the current $17 billion level to $5.5 trillion by 2030, according to

US Dollar mid-year outlook: Exceptional currency, exceptional risks?

The US Dollar enters the second half of 2026 in a markedly different position from a year ago. The King currency has recovered, reflecting persistent US inflation, changing expectations for Fed policy, geopolitical tensions and renewed demand for defensive assets.