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On Thursday, the Bank of England is set to deliver the February monetary policy decision, while Bank of England Governor Andrew Bailey is likely to face questions over negative UK rates at the scheduled press conference some thirty minutes after the policy decision.
The major focus of the policy meeting is of course going to be negative interest rates. The MPC will also publish the results of its recent consultation on negative interest rates. Consensus opinion suggests that the Bank of England will welcome negative rates as a potential policy tool but stop short of actually implementing them any time soon.
The rates market is expecting that the United Kingdom base rate to remain at extremely low levels right through to 2023. The current 0.1 percent interest rate is therefore expected to remain the floor on UK rates for the foreseeable future.
Recently, Bank of England Governor Bailey has started to talk down negative rates, however, a number of key policy members on the MPC have been particularly hawkish towards negative rates. I believe that the central bank will reinforce the message that negative rates are not currently needed but remain a potential strategy if the UK economy takes another downturn.
Additionally, the Bank of England are expected to talk up the prospects of the UK economy recovering due to the success of the ongoing vaccine rollout. I also expect the central bank to stop short of sounding hawkish but will sound cautiously upbeat towards the UK economy.
Governor Bailey will almost certainly take the time to talk up the recent solid UK employment report and the PMI manufacturing numbers. Bailey will have to acknowledge that the ongoing furlough scheme in the UK is masking the true UK job situation.
The central bank is also going to update its quarterly forecasts for the United Kingdom economy on Thursday; this could be a potential market mover if the forecasts are downgraded or indeed upgraded.
It should be noted that PMI services data has deteriorated significantly since the last policy meeting, and the United Kingdom is in the midst of a third national lockdown.
In terms of monetary support, the Bank of England is not expected to change its current QE purchases after the central bank increased bond buying from £875 billion from £725 billion in November.
In summary, the central bank will likely underscore the ongoing negative risks to the UK economy on Thursday but will most likely strike an optimistic tone towards the future prospect of the UK economy when the lockdown eventually ends, and indeed if the vaccine rollout continues to progress at its current pace.
Should we see the Bank of England sounding more dovish towards the UK economy then I would expect the British pound to take the brunt of the selling and the FTSE 100 to take the news in its stride.
If the central bank sounds more hawkish than expected I think sterling could take another stab above the 1.3700 handle and the FTSE 100 should also benefit. Any hint of the BoE considering negative rates then all bets are off, and I would expect a bloodbath in both the British pound and the FTSE 100.
