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Negativity to positivity: do pounds threaten negative interest rates?


The British currency completes the current week on a controversial note. Previously, the pound had to survive both a temporary increase and a long decline, but now difficulties have arisen due to the issue of negative rates. Experts fear that such measures could harm the pound, bringing down its dynamics.

The idea of negative rates, the introduction of which should help the economy of the United Kingdom, was previously voiced by the British authorities. However, its implementation seemed unlikely, almost impossible. At the beginning of March 2020, Andrew Bailey, the head of the Bank of England, spoke out against "lower zero" rates, believing that they would adversely affect the country's banking sector. However, the opinion of the head of the regulator has changed dramatically after two months.

According to A. Bailey, the Bank of England fully admits the introduction of negative rates and has already begun to consider options for this step. Such a decision almost immediately knocked the pound off track, shaking its position. The latest problem that sent the dynamics of the GBP downward was the depressing macro statistics released in the middle of the week.

According to the information provided, almost all indicators of the UK inflation rate came out in the "red" zone. Last month, the general consumer price index declined to -0.2%. On an annualized basis, this indicator also "went downhill," dropping to 0.8%. According to analysts, this is one of the weakest inflation rates over the past few years. The falling retail price index was not pleasing at all, and the indicator of producer prices declined by almost 10%, breaking the record once again. According to experts, the inflation rate in April 2020 was the slowest since August 2009.

At the same time, current evidence of a prolonged economic downturn in the British economy due to the COVID-19 pandemic could prompt authorities to introduce negative interest rates. This is facilitated by the weakness of British inflation, which may push the Bank of England to transfer the key rate to the negative zone. Experts fear that in this situation the negativity will outweigh the positivity, and the UK economy will not benefit from this step.

Nevertheless, relatively positive PMI IHS Markit data added a little positivity to the pound. According to current data, the UK economy showed slight signs of recovery in May after a sharp decline last April. However, in general, the picture is depressing, indicating a serious economic downturn, experts say. Yet, not too negative macro statistics, which slightly cheered up the market, contributed to the strengthening of the pound and the growth of GBP/USD. However, these measures were not enough to break the negative trend of the pair.

According to experts, the British currency is now in the lower band of its recent trading range, sharply responding to the devastating consequences of COVID-19 for the economy. On Friday morning, May 22, the GBP/USD pair began with low levels of 1.2211 - 1.2212. A day earlier, the pound declined by 0.2% to 1.2214, and now has broken its anti-record. According to experts, the pound's decline in May was about 3%.

According to analysts, despite the negative macro statistics, the British authorities should not rush into the introduction of negative rates so as not to weaken the already fragile positions of the pound. Experts also doubt the usefulness of such measures for the country's economy in the long-term, although they recognize that in a critical situation this scenario is fully justified.

The material has been provided by InstaForex Company -