BOE’s Sub-Zero Rates Risk the Pound

Speculation that the U.K. could possibly be the next major nation with negative interest rates, hurting the pound. This is driving a record rally in the country’s haven bonds.

Sterling fell against a stronger dollar and gilt yields touched fresh all-time lows. This was after BOE Deputy Governor, Dave Ramsden, became the latest policymaker to signal that a sub-zero rate could happen. 

Forex traders in money markets are betting that the U.K. could see sub-zero interest rates by the end of the year.

Ramsden’s comments are in line with other Monetary Policy Committee members this week. 

These have signalled that the BOE is giving serious consideration to putting negative rates in place. This was according to Lee Hardman, a foreign-exchange strategist at MUFG. 

Hardman said he doesn’t think it would be surprising to see the pound fall back towards March lows. That would be especially true if negative rates were put in place.

The pound slid back 0.4% to $1.2176, taking its losses this quarter to 1.9%. It makes it the worst performer among Group-of-10 major peers.

It fell to a 35-year low of $1.1412 in March. This was as London, the world’s largest forex trading hub, headed for lockdown, as the coronavirus spread.

Brexit Trade Talks also Weigh on the Pound 

Data on Friday showed a record U.K. budget deficit of 62.1 billion pounds ($76 billion) last month. Retail Sales data also collapsed by almost a fifth in April.

The Bank of England’s forecast expects an economic contraction of 14% this year. The pound is also weighed down by a lack of progress on Brexit trade talks. It could see a precipitous exit from the transitional period with the European Union at the end of 2020.

BOE Governor Andrew Bailey hinted at his own change of heart concerning negative rates. He has given testimony to parliamentary lawmakers earlier this week. That took two-year gilt yields, which are the most sensitive to interest-rate expectations, to a record low below 0%.

The yields dropped further on Friday in the wake of Ramsden’s comments to a new record at -0.07%. This was down by as much as three basis points. 

FX news reports the U.K. boosts debt supply to fund its crisis response. The central bank is soaking up much of that through its asset-purchase program. This leads investors to keep buying gilt.

Meanwhile, there is no good news for the pound. UK retail sales were dismal but the pound is being driven more by uncertainty about UK-EU trade negotiations. That is in addition to the aggravation by negative rate speculations.