Today we had the Bank of England interest rate decision and policy meeting, to which rates were unchanged as markets had expected.
The BOE did however increase its bond buying asset purchase programme by an additional £100bn to a total of £745bn . GBP initially reacted positively with a sharp spike in GBPUSD, reaching 1.25470 before sharply reversing to the downside, prices are currently trading at 1.24605 which around an 85 pip difference from the initial bullish spike.
According to ING analytics It is suspected that the £100bn increase just isn’t enough as this will only sustain purchases until September 2020.
Moreover, the BOE has decided to ‘slow’ the rate of bond purchases by approximately a half. Markets have not taken lightly to this, hence the sell-off we are witnessing in the pound currently. Instead of focusing on increasing stimulus, policymakers have taken more of a backstep.
With virus risks still lingering and economic concerns present both globally and domestically, there will undoubtedly be a discussion of negative rates as the BOE is pressured to do more. This could cap upside on Sterling.
The fact that the Bank of England won’t firmly rule out negative rates (eg, along the lines of “it’ll never happen”) means that markets will price in the outside chance of it happening. MPC will want to keep all options on the table – bearish for GBP