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Confusing Message from the Bank of England

September 22, 2020 By Mircea Vasiu

Just when one thought that Brexit negotiations and the pandemic are enough for the United Kingdom to handle, the Bank of England (BOE) delivers an unusual message. Before anything, consider that this is one of the oldest central bank institutions in the world, very conservative and attentive with the way it sets and communicates monetary policy.

Last Thursday, the BOE announced its monetary policy and hinted at negative interest rates. In a way, it was not something new as many central banks in the developed world dropped the rates below zero. The announcement increased the volatility on the GBP pairs, sending the EURGBP, for instance, higher on the day.

However today, the BOE’s Governor Bailey delivered a speech at a webinar hosted by the British Chamber of Commerce. He downplayed the negative rates scenario, only days after bringing it back on the table.

Bailey’s Remarks Creating Confusion Among GBP Traders

On the one hand, Bailey said today that the technical studies on negative rates would take some time. Therefore, he indicated that the Bank of England is in no rush to implement them anytime soon.

He also said that the negative rates statement from last week does not mean the BOE will use or implement negative rates. Instead, it is just a statement letting the market know that it is a possible tool to use somewhere in the future.

In a way, it represents one form of preparing the market participants for negative rates. No one should be surprised that the BOE will implement negative rates someday in the future – after all, it announced it is looking into it.

In contrast, the Fed in the United States never said that it is considering negative rates, so there you have a difference between two monetary policy courses of actions already priced in the market.

What is surprising is the timing of such remarks. Today’s speech, coming only two trading days after the BOE’s monetary policy decision and negative rates remarks, creates confusion among traders. Should we or should we not expect negative rates anytime soon?

In other words, last Thursday, markets interpreted that negative rates are “coming soon.” Today’s message says just the opposite.

The result? The GBP jumped across the board today, gaining literally against every other currency so far. The GBPUSD is back above 1.28, the GBPCHF back above 1.17, and the EURGBP fell to 0.9150 after trading well above 0.92.