Sterling stutters as UK negative rates speculation swirls

LONDON: Sterling held below a 2-1/2 year high on Thursday as speculation swirled that the Bank of England could bring in sub-zero benchmark interest rates earlier than expected to counter the economic hit from a third coronavirus national lockdown.

The pound has shed some of its post-Brexit trade deal gains this week, as traders refocused on the impact of the COVID-19 crisis after restrictions in Britain were tightened.

Sterling fell as much as half a percent against the broadly stronger dollar to $1.3537. It climbed above $1.37 for the first time since May 2018 on Monday.

Against the euro it was up 0.1%, last at 90.46 pence per euro.

Money markets now expect the central bank to take benchmark interest rates into negative territory as early as May, compared with an August estimate just after the Brexit trade deal was struck last month.

Some currency analysts have revised forecasts to expect an even earlier cut.

"The hit to the UK economy from the third lockdown will increase pressure on the BoE to deliver additional monetary stimulus as soon as their next meeting in February," analysts at MUFG said in a note on Thursday.

"We now expect the BoE to move rates into negative territory in February by lowering the key policy rate from 0.10% to -0.15%."

Morgan Stanley has said it expects the BoE to cut interest rates to 0% in February.

Not everyone is convinced the BoE will have to take rates below zero.

"We have a positive view on sterling overall. The Brexit risk has been removed but it's not really back to normal for sterling so we can start to think of the valuation of sterling versus other currencies," said Justin Onuekwusi, portfolio manager at Legal and General Investment Management.

"We see it as still quite undervalued, especially as the new COVID-19 strain won't remain a UK phenomenon. Negative interest rates is definitely a risk but it's not our base case."