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Are Negative Rates Coming In The UK?

May 20 2020, 02:04 PM (+06) | Orbex.com

Record Rise in Jobless Claims

The latest data released from the Office of National Statistics this week showed that the number of people claiming unemployment benefits in the UK rose by its highest level on record from March to April.  2.1 million people claimed unemployment over the period. This marked a jump of 69% on the prior month. It is the biggest monthly increase since the ONS began collecting data in 1971.

Joblessness on the Rise

The jobless figure, which rose by 856,500 over the month provides a clear picture of how the economy is suffering as a result of the ongoing COVID-19 lockdown.

The UK officially went into lockdown on March 23rd. As of May 7th, this was extended through to the next review on June 1st.

Some parts of the economy have been re-opening on a small scale. However, the vast majority of hospitality, retail, and leisure businesses remain closed. This means that the labor market data is unlikely to improve in the near term. May’s data should confirm an extension of this weakness.

Traders Increasing Expectations of Negative UK Rates

The dire state of the UK economy is drawing increased attention from traders who have now started to increase speculation that the BOE will introduce negative rates over the next 12 months.

This view was bolstered this week by comments from BOE member Silvana Tenreyo who said that “The BOE has not ruled out any policy tool”.

Going further, Tenreyo said:

“My personal view, which comes from the reading of the European experiences, is that negative rates have had a positive effect in the sense of having a fairly powerful transmission to real activity.”

BOE Cites Uncertainty in Outlook

The BOE has now reduced rates to record lows of just 0.10%. This is in a bid to buffer the economy during the ongoing disruption caused by the virus along with restarting QE of £200 billion.

While the BOE kept rates on hold at its recent May meeting, traders are expecting that the central bank will be forced to ease further in the coming months.

The BOE itself has noted that, while it expected the economy to recover gradually following the end of lockdown, there is a high level of uncertainty in the outlook.

Risks as Lockdowns Ease

As lockdown restrictions ease now, incoming health data will be keenly watched to see if there is any reoccurring spike in infections. If so, this could lead to stricter lockdown measures needing to be introduced.

In such a situation, the UK labor market would suffer an even worse blow, further adding to the misery seen across the economy.

GBPUSD Recovers Back Above 1.2190

GBPUSD

Following the breakdown below the 1.2190 support level, price has since recovered back above the level. While above here, bulls will be looking for a rotation back towards the 1.2586 level. This is a key topside level and capped the recent recovery off 2020 lows.

However, if we turn lower again, focus will shift back onto a test of deeper support at the 1.1929 level. This is the last key structural level ahead of the main 2020 lows at 1.1413.

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