Whilst the FOMC unanimously states that negative rates are unlikely in the US, across the pond we hear the case for the policy is becoming more likely in the UK. Bank of England members have reportedly begun actively reviewing the potential of such a policy, for the first time in the central bank’s 324-year history. Although going negative was something the previous BoE Governor Mark Carney staunchly disagreed with, his successor and current BoE governor, Andrew Bailey, yesterday told MPs: “I have changed my position a bit” adding that it would be “foolish” to “rule things out as a matter of principal.” Bailey did note how “absolutely critical” it would be to communicate such a policy as it is something "members of the public would find it quite challenging to understand". Clearly if the BoE is to go down this route, it must ensure the rate is fully passed on, which will affect the banking industry which makes up a large proportion of the country’s service sector. The central bank will have to provide ultra-low funding via a more generous Term Funding Scheme. The next policy meeting is on the 18th June, so we expect to hear more by then.
On Wednesday the UK government sold GBP3.8bn worth of three-year bonds at negative rates, of -0.003%. Despite investors getting back less than they paid on this issue, it was well oversubscribed which indicates that markets are pricing in negative rates, and expectations for a further increase to the GBP200bn bond-purchase program and further stimulus are high. The shorter-end of the curve, the most sensitive to rate changes, moved to record low yields yesterday and has continued the trend this morning. The two-year is currently trading at -0.07% and the five-year yield has fallen to -0.03%.
Sterling appeared to shrug off the news of potential below-zero rates and hung instead onto the stronger than expected preliminary May PMI readings yesterday, which albeit remained in contractionary territory. The Market UK PMI beat market expectation of 37.2, at 40.6, for example. This morning's retail sales prints broadly fell in-line with market expectations in April, as the nation’s lockdown took force; falling by a record 18.1%. Clothing and food were the largest drags, online sales however soared to record highs. Also of interest was the Office for National Statistics budget deficit release for April at GBP 62.1bn; that is equal to the total borrowing from the previous fiscal year. The pound is down against the dollar and the euro and is the worst performing currency so far this quarter, amongst the major-10 currencies.