Traders Bet U.K. Will Have Negative Interest Rates by Year End
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Investors are now betting the U.K. will join the negative-rates club by the end of December.
Spurred by Bank of England Chief Economist Andy Haldane’s comments that the institution is looking atunconventional monetary policies — including negative rates — more urgently, overnight interest-rate swaps for December’s meeting dropped below 0% for the first time.
Last week, money markets had seen the move in a year’s time.
“With inflation below target, the recovery incomplete and tighter fiscal policy in future years we expect the BOE to implement further stimulus,” wrote Robert Wood, chief U.K. economist at Bank of America Merrill Lynch, in a note to clients. “It seems increasingly hard to us to rule out a cut to zero.”
Bank of America also expects the BOE to boost its quantitative-easing program by at least 200 billion pounds ($242 billion) in August, on top of up to 75 billion pounds of extra buying in June.
Market pressure on the U.S. and the U.K. to cut rates below zero is growing with the coronavirus continuing to weigh on economic output. Still, officials are reluctant to make the move, citing risks that a negative interest-rate policy stifles bank profitability, and harms the economy more than it helps.
Morgan Stanley has also expressed such concerns, arguing in an emailed note that both Japan and the euro area — which have rates in negative territory — have seen greater underperformance of stocks, economic growth, loan growth and bank valuations than the U.S.
“We think that the Fed’s long-standing reluctance to take rates negative is well founded, and our economists and interest-rate strategists expect it to hold this line,” wrote Andrew Sheets, chief cross asset strategist at the U.S. bank.
The pound has born the brunt of rate-cut expectations — as well as renewed fears over a Brexit cliff-edge at the end of this year — sliding around 1.4% this month to $1.2104, the lowest level since March.
For HSBC Holdings Plc , the BOE may be forced into cutting interest rates below 0% by difficulties in enlarging its other main crisis-fighting tool: quantitative easing.
While still some way off its purchase limit of 70% of a single bond, a level of 50% has been found to be the level at which purchase become more challenging in Japan, it said. It’s there on some shorter-dated bonds already, the bank estimates.
“The Bank of England is burning through its asset purchases at a fast pace but this may not be sustainable over a prolonged period,” wrote Daniela Russell, head of U.K. rates strategy at HSBC. “With more stimulus needed, this could mean a change to how QE is implemented and it may also strengthen the case for negative rates.”
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