Whatâs Going On Here?The Bank of England (BoE) announced itâd leave the UKâs key interest rate unchanged on Thursday, but it might only be a matter of time before itâs forced to cut rates. What Does This Mean?The BoEâs decision comes after identical ones this month by the US Federal Reserve (the Fed), European Central Bank, and Bank of Japan. But where they see an improving economic outlook, the BoE warned the UKâs early recovery could implode. Thatâs because a no-deal Brexit could cause even more damage than the pandemic itself â not to mention that unemployment could shoot up when the UKâs support for furloughed workers stops next month.
Those risks have spooked the BoE so much itâs considering cutting UK interest rates into negative territory. That should keep the economy ticking over, but itâs not great news for commercial banks: negative rates are negative for profits, as eurozone banks know all too well, Good thing the BoEâs in damage control discussions with the UK banksâ regulator, then⊠Why Should I Care?For markets: Action plans.
When central banks lower interest rates, it usually boosts the regionâs stocks by making them appear more attractive than low-returning savings accounts. But investors who buy cheap-looking British stocks in hopes of an imaginary recovery risk getting caught in a âvalue trapâ. And that, plus the increased likelihood of negative UK rates, mightâve encouraged investors to ditch British assets on Thursday â including the pound, which initially fell 0.5% versus the US dollar (tweet this).
The bigger picture: Reaction plans.
The BoE said it wouldnât raise rates until inflation â i.e. the rate at which prices of goods and services increase â rises more quickly. The Fed said the same on Thursday, but also predicted US interest rates wonât increase until 2023. Thatâs caused confusion: those rates should stay low for longer given that the Fed thinks inflation will only be 2% by then. Remember, it recently promised to let inflation run higher than that for a while⊠| 