BOE Quick Analysis: Bailey blasts sterling with specter of negative rates, why more falls are likely

  • The BOE left its policy unchanged but hinted it is moving toward setting negative rates. 
  • Dovish guidance regarding inflation is also weighing on the pound.
  • Compounded with Brexit and furlough uncertainty, sterling has more room to fall.

Winter is coming and so are negative rates – that is the message from the Bank of England. The BOE has moved from saying that sub-zero borrowing costs are in the toolkit to being briefed on how to implement them effectively. 

Negative rates have failed to boost the Japanese and the eurozone economies – but have dampened their respective currencies. So far in the coronavirus crisis, printing more money boosted currencies – as it allows governments to spend more. However, punishing banks for parking their funds with the central banks is unequivocally adverse for the currency.

GBP/USD dropped below 1.29 in response, and there are additional reasons to expect more falls.

Why sterling may continue suffering

Andrew Bailey, Governor of the Bank of England, enjoyed unanimous support in his decision, showing high determination for such a move.

Moreover, the BOE released new guidance – no tightening until there is significant progress on the inflation goal.The "Old Lady" seems to be taking a page from the Federal Reserve's book. It expects inflation to remain below 1% – far off the 2% target – through early 2021. 

In addition, the bank says that there is a risk of a longer period of elevated unemployment. It said that for the current third quarter, it expects output to be 7% below the pre-pandemic levels seen in the fourth quarter of 2020.

Overall, the message is clearly dovish and may further weigh on the pound. How low will sterling go? That also depends on other factors. 

Concerns about Brexit remain prevalent and the fate of the goevrnment's successful furlough scheme – which kept employment high during the crisis – is unclear. 

More: Fed Analysis: No news is good news for the dollar, at least until Congress moves

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