Sterling fell more than half a percent against a broadly stronger euro today, 3,000 job cuts at British bank Lloyds underlining concerns that the UK economic outlook will only worsen in the months ahead following June’s Brexit vote.
Minds are already turning to next week’s Bank of England meeting, which is widely expected to cut the official interest rates investors get for holding the pound by at least a quarter point from a record low of 0.5 percent.
Yet since the 14 percent fall in the pound in the hours after the vote to leave the European Union on June 23, sterling has proved more robust than many major banks’ forecasts and derivatives market indications of its future value are now far more balanced.
“In order to trigger a proper (upward) trend we would need an improving capital flow situation or a turn higher in market interest rates and that is not going to happen. But the currency is not moving lower – and that may give us some indication that we have reached oversold territory.”
Former BoE policymaker David Blanchflower was the latest voice to suggest the Bank may cut rates into negative territory in an article in the Guardian newspaper this morning. British banks have already begun to tell savers that they may start charging them for depositing cash.
Interbank money markets, however, have yet to price in a cut in official rates into negative territory, conscious of past warnings from the bank that such rates might be counterproductive given the structure of UK banking.
We believe the BoE will cut by 25bp next week and announce GBP 50bn of asset purchases.