GBP Stalls As Negative Interest Rate Chatter Intensifies

The pound moved further away from the two-and-a-half year highs seen in the early part of 2021 following comments regarding potential negative interest rates from Bank of England policymaker Silvana Tenreyro. Speaking yesterday afternoon, Tenreyo stated that slashing interest rates below zero could boost the economy by more than expanding bond purchases. She also warned that the recent intensification of Covid-19 infections would imply a worse near-term outlook than anticipated last November, with the outlook for the rest of 2021 uncertain.

Never seen before in the UK, there is divided opinion the effectiveness of negative interest rates as a method of stimulating a countries economy. By making its base rate negative, the Bank of England would effectively be charging commercial banks for holding money with it. This would then encourage the banks to make more loans to individuals and businesses, theoretically increasing spend within the wider economy.

GBP dropped 0.5% immediately following the comments, with many analysts now expecting a move on rates by the central bank as early as May. Sterling is under increasing pressure as the UK Government could impose additional Covid-19 related restrictions in England amid warnings that the current lockdown measures may not be tough enough.

There will be further scrutiny of the UK GDP reading for November later this week, with figures released by the National Statistics on Friday. The reading will likely set the tone for the overall performance of the economy over Q4 2020 and could influence the Bank of Englands decision on future interest rate moves.