Summary

• The Bank of England’s MPC left the bank rate untouched at 0.1 pr cent in its September meeting
• Total quantitative easing including government and corporate bonds maintained at £745 billion
• MPC is planning to eliminate any technical barriers that might come in the process of reducing the interest rates below zero
• Pound fell against the USD to touch a value of 1.29 on 17 September 2020 after the MPC announcement

The Bank of England (BoE) has informed that its officials are preparing for a possibility of pushing the interest rates below zero during the next year 2021 to drive the private sector investments across Britain.

Many other regions such as the Europe and Japan have already lowered their interest rates to negative values to lower the cost of borrowings for their businesses.

The Monetary Policy Committee (MPC) has stated that it is planning to eliminate any technical barriers that might come in the process of reducing the interest rates below zero. However, this situation is not likely to arise during the year 2020, clarified MPC.

The BoE has stated that given the outlook on inflation and economic output in the UK, the central bank might be compelled to use negative rates next year.

Bank rate unchanged

Until now, the committee had argued that the interest rates would not tread at sub-zero levels as it would make the mortgage lending non-profitable. Bot not any more. Given the uncertainties surrounding the UK economy’s revival, the committee changed its stance on its latest meeting held on 17 September 2020. While the MPC left the bank rate untouched at 0.1 per cent, it has officially announced that beginning Q4 2020, it will introduce structural changed needed to tread the sub-zero territory in a smooth manner.

Philip Shaw, senior economist, Investec Bank said that a sub-zero bank rate seemed like a real possibility now, given the dire state of the British economy.

The committee emphasised that while the economy was gradually recovering from the coronavirus slump, but the continuing health concerns with rising Covid-19 infections will not allow the national economic output to make a sharp turnaround very soon.

MPC retained its quantitative easing (QE) program at the level of £745 billion, which had earlier been increased from a level of £300 billion in March 2020. Financial experts forecasted that the central bank could up the QE target by £100 billion in its next meeting due in November 2020.

Inflation fell to 0.2 per cent

Andrew Bailey, governor, BoE said that he could manage to retain the bank rate at the same level despite a drastic reduction in the UK’s inflation rate to 0.2 per cent for the month of August 2020. It was recorded at a value of 1 per cent for the last month of July 2020.

He clarified that with the government support policies such as Vat and business rate cuts, eat out to help out scheme promotion, and stamp duty holiday, coupled with a sustained low demand for goods and services across the economy, inflation was only expected to fall sharply.

However, MPC projected that the British economy would grow by a healthy 18 per cent during Q3 2020, expecting that the impact of coronavirus pandemic would reduce by the end of the year. It reiterated that the central bank will use the monetary policy to enhance the nation’s business activity as much as possible and interest rates might not rise beyond 0.1 per cent for the next five years, in any case.

Pound fell with the news of a negative rate possibility

The Sterling pound to US dollar rate dropped briefly just after the announcement of the BoE policy decision regarding the possibility of a sub-zero bank rate in the year 2021. The GBP/USD rate dropped to a low of 1.29 on 17 September at 1 PM. Its value later recovered slightly and on 18 September at 3.30 PM, it was trading at a value of 1.30.

Pound to USD history

(from 22 Mar to 18 Sep 2020)

However, unless there are concrete positive developments that make the investors happy, either from the BoE or on the Brexit front, the potential exchange rate gains could be limited.

In the midst of these challenging times, let us take a closer look at two prominent bank stocks (LLOY and BARC), whose fortunes are expected to get impacted with any further downward changes in the interest rates.

Lloyds Banking Group plc

The company stock (LON: LLOY) was trading at a value of GBX 25.42, down by 3.18 per cent on 18 September 2020 at 4.24 PM from its previous close of GBX 26.26. The group’s market capitalisation was recorded as 18,585.38 million pounds at the time of reporting. The stock displayed a negative year to date return of 58.79 per cent. The total volume of shared traded were 205,644,280. The stock’s 52-week low/high range was reported to be 25.88 / 67.25.

Barclays plc

The company stock (LON: BARC) was trading at a value of GBX 97.88, down by 2.65 per cent on 18 September 2020 at 4.29 PM from its previous close of GBX 100.54. The group’s market capitalisation was recorded as 18,585.38 million pounds at the time of reporting. The stock displayed a negative year to date return of 45.71 per cent. The total volume of shared traded were 39,428,174. The stock’s 52-week low/high range was reported to be 80.24 / 192.46.

The Bank of England’s decision to contemplate on moving the interest rates in the sub-zero category is a very big move. The MPC has announced that the technical glitches in doing so will be removed during with the last quarter of 2020. The British banks will surely be impacted and will have to gear up to handle such a challenging situation. Nonetheless, it might just prove to be a magical potion to revive the dried-up private investments and boost the much-needed economic growth throughout the country.