Pound’s 3-Week Winning Streak at Risk as Negative Rate Talks Heat Up

By Yasin Ebrahim

Investing.com – The pound tumbled for a second-straight day Thursday, threatening to snap a three-week win on rising expectations the Bank of England could cut rates below zero to support the U.K. economy.

GBP/USD fell 0.54% to $1.3279, to remain close to session lows of $1.3243.

In the run-up to the BoE meeting next, governor Andrew Bailey has wheeled out the possibility that the bank could adopt negative interest rates in a worst-case scenario involving a second wave of Covid and failure to break the current deadlock on post-Brexit trade talks.

While bond buying, or quantitative easing, is the preferred tool for the central bank, in a worst-case scenario “the case for bringing [negative rates] out of the toolbox would be strong,”  Bailey said.

The BoE governor also warned that fears of a second wave of the virus were weighing on the pace of the recovery, keeping key parts of the economy operating well below normal levels.

The move seemingly marked a bearish shift in tone on the pace of the recovery as it was just under a month ago that the Bank of England revealed a surprisingly bullish outlook. In August, the central bank forecast the economy to contract by 9.5% this year, up from a previous estimate for a 15% reduction.

The comments echoed those of BoE Monetary Policy Committee Gertjan Vlieghe who earlier this week said that it could be years before the economy returned to full capacity.

“(T)here is a material risk in my view that it could take several years for the economy to return to full capacity and inflation to return sustainably to target, even with monetary policy at its current settings,” Vlieghe said in an annual report to lawmakers.

The coming weeks will likely offer clues on the strength of the U.K. recovery as some of the government’s emergency stimulus programs, including the jobs retention scheme, are set to come to an end.

The Bank of England will unveil its monetary policy MPC announcement on Sept. 17.