Late last week we saw the Pound drop 0.6% against the dollar to trade as low as $1.2882 and lost a similar amount against the Euro. Is it time that the Bank of England started to explore the implementation of a negative Bank Rate, the question becomes, does inflation or output warrant this at some point?
Policymakers are typically averse to these conversations, but an alternative to quantitative easing or bond-buying may well need to be considered. The conclusion to the conversation is that the Bank of England would begin a “structured engagement” on operational considerations for negative rates in the last quarter of the year.
Investors generally are expecting heightened volatility in the Pound until November, when the bell will eventually toll for the policymakers to finally come to an agreement on trade before the UK drops out of the EU’s single market. If Britain leaves without the agreement, some have said that negative interest rates will be the last tool in the box.
Spencer Nixon of Privalgo commented:
“The use of negative interest rates is a dangerous game; however, I do see a strong likelihood towards the movement due to there being very few alternatives”.
The knock-on negative effects may be reminiscent of the Bank of Japan’s monetary experiment in 2016, the result was that six months later, the Japanese economy showed no growth, and its bond market was a mess. Conditions then deteriorated so far that the Bank of Tokyo-Mitsubishi UFJ Ltd, Japan’s Largest private bank, announced in June 2016 that it wanted to leave the Japanese bond markets because the Bank of Japan’s interventions had made them unstable.
The opposing argument to this. Negative interest rates act as a port to stimulate the economy in removing the desire to hold cash sums with the central bank. Or any corporation or individual to hold cash assets with a commercial bank.
Forcing lending from banks, investment from corporations and spending at a localised level within a community. All having the ability to boost growth
Great change can come with great opportunities and huge consequences. The Bank of England will inevitably have to consider all the positive and negative connotations before they make their decision.
Andrew Bailey was quite clear that he was totally against the use of negative interest rates when he became Bank of England governor in March. “On the whole, negative interest rates, no . . . it is not an area I would want to go to,” he told MPs.
Andrew Bailey made it clear on Tuesday the 22nd of September, that the Bank of England was not about to push interest rates below zero in the near future.
A change in interest rates can be directly correlated to the value of a currency. A weaker pound can drive the value of a market upwards due to overseas holdings. A cheaper currency will mean economic growth can be forecast due to increase exports and demand for said countries product and services.
Volatility within the foreign exchange market can make decision making difficult. Without the correct management, advice and understanding the perceived risk can be far in excess of the actual risk. Our Foreign currency specialists are on hand to assist. Remove the fog today and talk to Privalgo.
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