The pound rebounded this afternoon as the Bank of England announced it would leave interest rates unchanged.
The currency saw its biggest fall in three weeks this morning as traders nervously waited to see whether the BoE would formally endorse negative interest rates.
The Prudential Regulation Authority’s analysis found the UK would need six months to prepare for negative rates as anything sooner would risk incurring “increased operational risks”.
The bank’s Monetary Policy Committee (MPC) unanimously voted to keep rates at 0.1 per cent and its bond-buying programme at £895bn.
Sterling welcomed the central bank stepping back and returned cable to $1.367 while two-year yields jumped from 0.1 per cent to 0.05 per cent.
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Against the euro it moved from a 0.2 per cent decline to a 0.6 per cent rise to reach a nine-month high of €1.141.
“This was primarily because traders know that negative interest rates are not going to become a reality,” Naeem Aslam, Ava Trade’s chief market analyst. “This particular fact was holding Sterling from further appreciation. Now, it is pretty much clear that negative interest rates are not going to come into daylight. Hence the path of the least resistance for the Sterling is skewed to the upside.”
But the bank did not rule out negative rates entirely, hinting they could be used in the future should conditions warrant them.
In a statement the BoE said it was expecting a rapid recovery in GDP towards pre-pandemic levels in 2021, led by the UK’s vaccination programme. However it cautioned the outlook for the year remains “unusually uncertain”.
“It depends on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments”, the nine-strong MPC added.
By Angharad Carrick
Source: City AM
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