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Bank of England rate preview: will the MPC talk negative rates?

The Bank of England look unlikely to shift policy ahead of a crucial fortnight of Brexit negotiations. However, with the potential for economic turbulence ahead, how will the bank prepare for the worst?

When and where?

The Bank of England (BoE) will conclude their latest monetary policy meeting at midday, on Thursday 17 December 2020.

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

What now for the MPC given vaccine and Brexit factors?

The Bank of England meeting looks likely to be a somewhat quiet one in terms of policy, with precious few people expecting any major shift of the current policy mix. That view is highlighted by the market probabilities of any rate shift, with the default outcome being that the Monetary Policy Committee (MPC) keeps rates steady for the entire 2021.

However, that market view is perhaps less reflective of the truth, and more about the view that we will gain greater clarity in the months to come. There is plenty of uncertainty ahead that committee members will find it tough to model around.

The most pressing issue is that of Brexit, with the coming weeks set to provide the basis for trade as we move forward. There is little reason to base monetary policy on a guess of what could be around the corner. Thus the MPC will likely want to hold off until we see greater clarity on the UK-EU relationship and how that is impacting the economy. The economic fallout of Brexit remains uncertain whether we achieve a deal or not.

On the flip-side, the economic picture does look more positive from a pandemic perspective, with the UK expected to be at the forefront of the push to vaccinate their population. The UK is forecast to vaccinate 50% of the country by the end of March 2021, which does point towards a return to relative normality in the coming months. However, quite whether that is achieved or whether the economy can rebound as quickly as hoped remains to be seen.

From a policy stance, there is little left for the Bank of England to do. The key move of note would be a decision to cut rates to below zero for the first time in history. There are some doubts as to whether this would be a sensible idea, given the technical difficulties and questionable experiences from the likes of Japan, Europe, and Switzerland.

Nevertheless, traders will be keen to understand exactly what could be on the cards should the UK economy take a turn for the worst once Brexit hits. Thus keep an eye out for any talk around negative rates as a potential driver of sterling weakness.

Where now for the pound?

GBP/USD has somewhat predictably seen a pick-up in volatility over the course of the past week, with the pair turning lower on fears of an impending no deal Brexit. Weekend discussions failed to rule out a deal, and we have seen the pair move higher from a confluence of trendline and Fibonacci (61.8%) support.

​That does highlight the overall uptrend we still see on the daily timeframe, with a break back below the $1.2855 level required to negate that view. With traders wondering exactly what the BoE plan to do in the event of a disorderly exit from the block, a failure to clarify their willingness to use negative rates could ultimately provide a more higher for the pound. As such, while we are expecting plenty of news-driven volatility in the weeks ahead, it seems as though the wider uptrend is coming back into play here for GBP/USD.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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