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Bank of England rate preview: does the vaccine negate the need for negative rates?

The Bank of England weighs up the short-term risks with expectations of a vaccine-led recovery. Will the MPC move away from negative rates in hope of a 2021 recovery?

When and where?

The Bank of England (BoE) will conclude their latest monetary policy meeting at midday, on Thursday 4 February 2021.

Tune in to IGTV’s live BoE announcement and analysis at 11:55 AM BST on Thursday in the IG platform.

Will the vaccination push reduce the need for further action?

The BoE are in an interesting position at the moment, with the committee expected to balance near-term struggles with future optimism. The UK vaccination push has been arguably the most successful element of this governments coronavirus response.

That success should help reduce the time that the length of the lockdown, which will have an impact on BoE thinking. From an economic front, there is no doubt that the current picture is alarming, with unemployment rising, services within contraction, and consumer confidence in the doldrums.

Crucially inflation also remains depressed, with the CPI rate of 0.6% well below target (2%).Therefore, it appears to be a case of weighing up ongoing struggles with the notion that vaccination efforts will soon remedy many of the ongoing problems without the need for negative rates.

Will the BoE extend QE or implement negative rates?

Quantitative easing (QE) remains a key tool that the bank continues to use, yet the previous top up in November means we are unlikely to see any additional funds added this week.

As such, the focus falls onto rates, with traders considering whether the previous openness to negative rates remains relevant given the current path we are on. It is highly unlikely we will see any shift on rates, and thus traders will be looking carefully to see if the Monetary Policy Committee (MPC) moves away from the notion that we could see negative rates anytime soon.

The Refinitiv table below highlights how markets see a rate cut as a major outlier to the core expectation of steady rates.

It is notable that the new strains do pose a risk to the vaccination process and the MPC will be well aware of this. As such, it is likely they will approach with caution given that the inoculation drive is in its infancy.

Markets will also be on the lookout for the findings of a review into exactly how negative rates would work in the real-world. That report comes from the Prudential Regulation Authority (PRA) and thus it is uncertain whether we will see an update on Wednesday or something separate in time.

Where now for the pound?

GBP/USD is at risk of turning a corner after a period of consistent gains, with the US dollar finding itself in favour of late. The daily chart highlights this pullback, with price falling through trendline support to hit $1.3609. For now that level holds, yet there is a significant risk of further downside from here if broken.

From a BoE perspective, a surprise dovish vote or openness to negative rates could help drive this move lower. There is a risk here, with the long uptrend likely to give back some of that ground at some point. Whether that comes now or not will likely hinge on the ability to break through or rebound from this $1.3609 support level.

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