Pound Tumbles After BOE Said It Discussed Implementation Of Negative Rates

There were no initial surprises when the first headlines hit from the BOE’s decision this morning in which, just like the Fed and the BOJE hours before it, the central bank kept its rates on hold and its QE program unchanged at GBP745BN in a 9-0 decision, both as expected.

At its meeting ending on 16 September 2020, the MPC voted unanimously to maintain #BankRate at 0.1%. https://t.co/O37GrVu0La pic.twitter.com/1R1abGJjEr

— Bank of England (@bankofengland) September 17, 2020

Echoing the Fed, which pledged not to hike rates until at least 2023, the BOE repeated it pledge not to tighten until U.K. inflation, currently at 0.2%, is sustainably moving to its 2% target. Economists also predict the QE program will be expanded by 50 billion pounds in November.

However, after an initial kneejerk move higher, cable quickly tumbled after algos read all the way to the final bullet #52 in the Monetary Policy Minutes which revealed that the Monetary Policy Committee had been briefed on plans to explore how a negative rate could be implemented effectively should the outlook for inflation and output warrant at some point during this period of lower equilibrium. The Committee had discussed its policy toolkit, and the effectiveness of negative policy rates in particular, in the August Monetary Policy Report, in light of the decline in global equilibrium interest rates over a number of years. Here is the section in question:

The Committee had discussed its policy toolkit, and the effectiveness of negative policy rates in particular, in the August Monetary Policy Report, in light of the decline in global equilibrium interest rates over a number of years. Subsequently, the MPC had been briefed on the Bank of England’s plans to explore how a negative Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates. The Bank of England and the Prudential Regulation Authority will begin structured engagement on the operational considerations in 2020 Q4

In response, the pound clumped to an intraday low, trading down 0.6% at $1.2892.

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Officials also said that while recent data has been a little stronger than expected, they still think there is “a risk of a more persistent period of elevated unemployment than in the central projection.”

“The Committee will continue to monitor the situation closely and stands ready to adjust monetary policy accordingly to meet its remit,” the BOE said.

STIR traders were caught offside, as moments before the announcement money markets trimmed bets on interest rate, with traders pricing in the next 10bps rate cut in June compared with February on Wednesday just before the decision, and about 13bps of easing is priced at the end of 2021.

Some more highlights from the report, courtesy of NewsSquawk:

ECONOMIC DEVELOPMENTS

• 2020 Q3 as a whole, Bank staff expect GDP to be around 7% below its 2019 Q4 level, less weak than had been expected in the August Report
• CPI inflation is expected to remain below 1% until early 2021, albeit slightly higher than expected at the time of the August Report.
• Overall, the Committee judged that inflation expectations remained well anchored and consistent with inflation close to the 2% target.
• The outlook for the economy remains unusually uncertain. The MPC’s central projections in the August Monetary Policy Report assumed that the direct impact of Covid-19 on the economy would dissipate gradually

BREXIT

• Market contacts had also reported renewed concerns over recent Brexit developments.
• The sterling exchange rate index has fallen by around 2%, in part reflecting recent Brexit developments.
• The Committee would consider economic issues relating to Brexit within the context of its wider forecast discussions ahead of the November MPC meeting.

GUIDANCE

• As in the August Report, there remains a risk of a more persistent period of elevated unemployment than in the central projection.
• The Committee will continue to monitor the situation closely and stands ready to adjust monetary policy accordingly to meet its remit.
• The MPC will keep under review the range of actions that could be taken to deliver its objectives.
• The Committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.

The U.K. has been facing a resurgence in virus infections and restrictions, as well as fears unemployment could spike when government aid programs are withdrawn next month. Concurrently, Prime Minister Boris Johnson’s threats to redraw his Brexit deal with the European Union could scupper any chance of a trade accord before the Dec. 31 deadline, further boosting economic turmoil.