Tuesday, 02 June, 2020

BoE: Negative interest rates not ruled out

A British pound note is seen in front of a stock graph in this A British pound note is seen in front of a stock graph in this
Ginger Lawrence | 22 May, 2020, 16:22

Yields for two-year benchmark gilts, which are sensitive to BoE rate expectations, sank to a record low of -0.051 per cent last week.

"The impact of the Bank of England's rate cuts and increased asset purchases is absolutely clear from this morning's groundbreaking gilt auction", said Hugh Gimber, global market strategist at J.P. Morgan Asset Management.

Investors paid the United Kingdom government to borrow money for the first time on Wednesday as Britain sold a bond at a negative yield. "It suggested that investors perceive the deflationary threat of the current business disruption to be greater than the inflationary potential of government measures to support the economy - at least for the three years period of the gilts that were sold".

Negative interest rates potentially challenge some banks' and building societies' solvency as they find it hard or impossible to apply them to customers' savings accounts.

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"With little prospect of the Treasury reining in spending any time soon, we expect purchases by the Bank of England to continue at a healthy pace to ensure that the government can finance its record levels of borrowing at record low rates over the coming quarters".

Japan, Sweden, Switzerland, and Denmark have all had negative interest rates in the past. The yield is the return a bond buyer is willing to accept to lend money.

Investors have been piling into gilts amid the Covid-19 pandemic, with United Kingdom government bonds seen as a safe haven due to Britain's strong creditworthiness, especially in times of economic turmoil.

Despite the negative yield and in a sign of unwavering demand for United Kingdom gilts, the DMO revealed there were £8.1 billion of orders in the Wednesday gilt auction - more than twice the amount it was looking to sell.