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BoE not remotely close to decision on negative rates, says chief economist

The Bank of England’s chief economist has said the bank is not remotely close to any decision on taking interest rates below zero to cope with the pandemic.

Andy Haldane said the key factors for the BoE to consider were the consequences of negative rates for banks and lenders, which would squeeze margins.

“Those are the aspects that we’ll look at,” Haldane said during an online discussion organised by the Confederation of British Industry on Tuesday.

“To be clear, reviewing and doing are different things and currently we are in the review phase and have not reached a view remotely yet on the doing.”

Since the start of the coronavirus outbreak, the bank has slashed its main rate to a record low of 0.1 per cent, prompting questions about whether it will cut into negative territory to stimulate the economy further.

It would mean banks are charged a small amount for keeping their money with their country’s central bank. The European Central Bank’s (ECB) deposit rate is currently minus 0.5 per cent.

Last week, BoE governor Andrew Bailey said it would be “foolish” to rule out negative interest rates. He has previously argued against them but admitted he had changed his position.

He was keen to highlight that the Bank is not saying it will cut rates further: “We’re not ruling it in but we’re not ruling it out.”

Haldane also said the recent economic data was coming in a “shade better” than a scenario published by the bank earlier this month.

“This is perhaps still a V but perhaps a fairly lop-sided V,” he said, referring to the shape of the economy’s downturn and recovery.

“The risks to that probably…lie to the downside rather than the up and as I say, a rather more protracted recovery even than the one that I have mentioned.”

By Angharad Carrick

Source: City AM

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Bank of England not ruling out negative interest rates

Government bonds have been sold in Britain for the first time with a negative yield.

And the Bank of England has admitted it would be “foolish” to rule out cutting interest rate to below zero.

The negative yield bond (a £3.8billion three-year gilt auction with an interest rate of -0.003 per cent) effectively means investors are paying lend money to fund the Government as it deals with the financial impact of the coronavirus pandemic.

And Bank of England governor Andrew Bailey said how low the cost of borrowing could go would be kept under “active review”.

He said: “We do not rule things out as a matter of principle. That would be a foolish thing to do. But that doesn’t mean we rule things in either.:

Minimal or negative interest rates deter savers with the intention of them spending what money they have to stimulate the economy.

Tim Watkins, managing partner of Shurdington-based accountants Randall & Payne, said: “Another first!. Britain had never sold a government bond with a negative yield until Wednesday.

“The interest rate is 0.75 per cent but the price investors paid for the bonds was more than they will receive when the bond is repaid.

“A first for Britain but we join Japan, Germany and some others. It doesn’t mean investors will make a loss as bonds are traded but it’s a position no one would have imagined a few months ago.”

He continued: What does it signal? It’s an indication, if another was needed, that there could be a major recession coming, central banks want to own safe assets in these circumstances and our debt is considered safe.

“It’s a relief at the moment with such a borrowing requirement that Britain is considered safe and the cost of borrowing is low.

“If that were to change it would add even further to the debt mountain we could have when this is all over.”

Martin Day, director of The Bespoke Banking Consultancy in Gloucester believes the spectre of negative interest could encourage spending as the economy shrinks.

He said: “It seems the policymakers will come under more pressure to take action to boost the economy as the UK sells bonds with a negative yield for the first time.

“The sale does reflect rising expectations that the Bank of England will increase its £200billion bond purchase shortly.

“Bank of England governor Andrew Bailey recently told MPs that the possibility of negative rates is being kept under review.

“This move could be used to urge corporates and companies to spend rather than hold funds in bank accounts.”

By Rob Freeman

Source: Punchline Gloucester

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GBP: British pound tumbles as Brexit talks end in disarray

  • The British pound index declined after the third round of talks ended without a deal.
  • The UK side said the EU insistence of a “level playing field” was to blame.
  • The UK has until June 30 to request for an extension of the transition period.

The British pound dropped sharply after the European Union and the UK concluded the third round of negotiations. The pound index declined by more than 2% while the GBP/USD pair declined by almost 60 basis points.

British pound falls as Brexit talks end in disarray

The British pound sank today after the third round of talks ended in disarray as I had predicted. In a statement, David Frost, the chief UK negotiator said:

“I regret however that we made very little progress towards agreement on the most significant outstanding issues between us.”

In the statement, he said that the European Union had refused to engage on creating a good Free Trade Agreement (FTA) with the UK. He said that the main obstacle was that the EU insisted on including a set of unbalanced proposals that would bind the UK to EU laws.

In another statement, Michel Barnier, said that talks with the UK were disappointing. In his statement, he said that the EU was not going to seal a new trade deal until a level playing field was established. He said:

“We’re not going to bargain away our values for the benefit of the UK economy.”

Key Brexit issues

There are several differences between the UK and the European Union. The most basic one is that the UK insists on being an equal of the European Union. In a statement last week, Barnier said that the UK was a country of 66 million people against the EU’s population of about 450 million people.

The biggest difference between the two is that the UK insists on a free trade agreement (FTA) like the one the EU has with Canada. The Canadian deal removes most tariffs and quotas while leaving Canada to regulate itself.

The EU has rejected this this idea, saying that such a deal would not work because of the volume of trade involved. While the EU and Canada do business worth more than €72 billion, the UK exports goods worth more than £291 billion to the European Union. This represents about 44% of the total UK exports.

The EU argues that allowing the UK to regulate itself will be unfair to companies in the European Union. As such, it proposes an agreement where the UK stays within the EU regulations.

There are other differences in the Brexit talks. For example, the UK has said that it wants to control its rich fishing waters. The EU has rejected this because its fishermen catch more than 50% of their fish from the UK waters. In the statement, Frost said:

“It is hard to understand why the EU insists on an ideological approach which makes it difficult to reach a mutually beneficial agreement.”

The challenge for the UK is that Boris Johnson has said he will not ask for an extension to the transition period. With the June 30 deadline reaching, analysts believe that chances of leaving without a deal are high.

By Crispus Nyaga

Source: Invezz

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Bank of England ‘not contemplating’ negative interest rates, says governor Andrew Bailey

Bank of England governor Andrew Bailey has said Threadneedle Street is not considering cutting interest rates to below zero.

The governor said that it would be unwise to rule anything out, “particularly in these circumstances,” in an online question and answer session with the Financial Times.

Yet he said: “It is not something we are currently planning for or contemplating.”

His comments come after deputy governor Ben Broadbent said the Bank was open-minded about its next steps. He said of negative interest rates: “These are the balanced questions the committee has to think about.”

Although once unimaginable, negative interest rates have been put in place in various central banks around the world over the last decade. The European Central Bank (ECB), for example, charges banks to hold money with it in an effort to force them to lend.

Negative rates come with pros and cons. They help spur lending by penalising banks for sitting on money. But they also limit the profits banks can make through lending and the interest on savers’ deposits.

The Bank of England slashed its main interest rate to 0.1 per cent, its lowest ever level, in March.

Bailey said that one of the main obstacles to cutting interest rates into negative territory would be the optics of the complex move.

“I think from a communications point of view, and therefore from a reaction and expectations point of view, it is a very big step.”

He said it must be realised that negative interest rates cause banks problems. The Eurozone’s biggest banks have long complained that the policy hurts their profits.

Should the Bank decide to unleash more stimulus, most analysts think it will ramp up its £645 billion quantitative easing (QE) programme. Under QE, the Bank creates digital money and uses it to buy bonds – mainly government Gilts – in the secondary market.

The BoE stopped short of launching more bond-buying at its last meeting but could do so in June.

By Harry Robertson

Source: City AM

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Bank of England holds base rate at 0.1% and warns of sharp recession

The Bank of England has held its base rate at 0.1% but warned it expects a sharp recession in the first half of the year as a result of the coronavirus restrictions.

In its May monetary policy report, the bank noted that the spread of Covid-19 and the measures to contain it were having a significant impact on the United Kingdom and many countries.

“Activity has fallen sharply since the beginning of the year and unemployment has risen markedly. Economic data have continued to be consistent with a sudden and very marked drop in global activity,” it stated.

However, the Bank of England also highlighted that there were some “tentative signs of recovery” in countries that were starting to relax restrictions and that financial markets had recovered in part.

And indicators of UK demand have generally stabilised, albeit at very low levels, in recent weeks after “unprecedented falls” during late March and early April.

Banking stability

The central bank believes the core banking system has “more than sufficient” capital to absorb expected losses and that there will be capacity to provide credit to support the UK economy.

In its scenario, it is anticipating that overall economic activity (GDP) will fall 14% in 2020 but rebound by a similar amount in 2021, although it will not reach its pre-coronavirus size until the middle of next year.

Household spending is expected to follow a similar pattern to GDP, but consumer savings is anticipated to rise sharply this year but then fall back in the next two years.

This will have an impact on inflation, as will falls in oil prices, with inflation potentially hitting 0.6% over 2020 as a whole and reaching zero at the end of the year.

Unemployment is predicted to double to around 8% in 2020 but return to around the pre-coronavirus position in 2022.

The scenario also assumes the UK will complete an orderly free trade agreement with the European Union at the end of the year, however this is not certain and disagreements during negotiations have been public from both sides so far.

Kevin Brown, savings specialist at Scottish Friendly, said: “The Bank of England’s report on the economy makes for bleak reading, but it is still holding out hope for a reversal of much of the economic misfortune the country is suffering thanks to coronavirus, by the middle of next year.

“Markets have largely responded to the crisis already and much of this fresh economic data is already priced in. It is impossible to predict a bottom, but one thing’s for sure, savers won’t find succour in a savings account paying 0.5% interest.

“It’s a tough time for savers out there and many are being caught out by the speed at which rates on cash accounts are changing. The signals given out by the Bank of England suggest the base rate is going nowhere and this should be a catalyst to anyone with a savings pot to make sure they’re getting the best out of it, by considering ways to maximise their potential returns.

“Many high street banks, building societies and challenger banks are cutting rates but there can still be ways to generate above inflation returns by exploring alternatives such as regular savings accounts, longer fixed-rate ISAs and stocks and shares.”

Written by: Owain Thomas

Source: Your Money

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Bank of England rate preview: markets braced for GDP forecasts

Andrew Bailey hosts his second BoE meeting, but the volatility could come from forecasts rather than any shift in their monetary policy framework.

When and where?

With the Covid-19 crisis keeping everyone locked up, the forthcoming Bank of England (BoE) monetary policy meeting will be virtual, taking place on Thursday 7 April 2020. Most notably, this announcement will take place at 7am local time, rather than the usual midday timing.

Will we see any change to monetary policy?

The coronavirus crisis has seen central banks across the globe push the boat out in a bid to minimise the fallout from global lockdowns that have affected businesses and individuals alike.

In the UK, Governor of the BoE Andrew Bailey didn’t mess about, slashing interest rates to 0.10% and expanding the quantitative easing (QE) program by £200 billion in his first week as the governor. That QE programme stands at £645 billion, and remains a tool which could be expanded when it is deemed necessaryto support the governments push to mitigate the virus fallout. Some have speculated that the timing of this meeting (pre-market open) could highlight a potential market moving announcement such as further QE in the offing. On the interest rate side of things, there is arguably little left to benefit from implementing lower rates, with the restrictions on movement and businesses inhibiting the ability to borrow and invest.

With that in mind, markets are currently pricing in a 99% chance that the committee will keep rates steady at the forthcoming meeting.

What should we look out for?

Perhaps the most interesting part of the meeting comes in the form of the forward looking guidance on where inflation and particularly growth could be in the quarters ahead.

With UK prime minister Boris Johnson showing few signs of reopening the economy in the coming weeks, the global growth picture for second quarter (Q2) is dour. For markets, this expectation of huge economic contraction could see the pound hit hard, with some looking for a figure in the -35% region for the quarter. From an inflation perspective, we are seeing global disinflation take hold, and that is likely to be reflected in forecasts. Remember that low inflation also means looser monetary policy for the foreseeable future irrespective of the coronavirus response needs.

Aside from the growth and inflation forecasts, markets will also be on the lookout for guidance on how the BoE sees the recovery playing out. Thinking back to the Federal Reserve (Fed) and European Central Bank (ECB) meetings from last week, there has been a clear focus on avoiding expectations of a sharp v-shaped recovery for growth, with the road back to health likely to be drawn out given the speculation that it could take over a year to create a vaccine or cure for this virus.

Where now for the pound?

The pound has been on the rise since its mid-March low, with the pair ultimately reaching resistance at the 200-day simple moving average (SMA) level. That has proven a key roadblock to further gains, with the second attempt to break higher once again faltering at that indicator.

This could be a bearish signal coming into play, with the rally seen over almost two-months looking like a potential retracement and precursor to further downside. Much of that sentiment will be driven by wider market movements, with GBP/USD looking remarkably like the FTSE 100 given the inverse correlation between the dollar and global stocks. Nevertheless, there is a chance we could see the pound suffer if forecasts signal potentially a huge decline in Q2 gross domestic profit (GDP).

With that in mind, we could ultimately top out at the 200-day SMA, with a breakdown below 1.2247 providing a bearish reversal signal. As such, the wider outlook will be determined by the ability to break either 1.2247 or 1.2648.

By Joshua Mahony

Source: IG

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Pound Sterling in Recovery Mode against Euro but Faces Cocktail of Risk Ahead

The Pound-to-Euro exchange rate moved back above the 1.14 level on Thursday and looks set to recover most of the sharp decline it experienced on Tuesday, a decline that coincided with a broad-based retreat in stocks and oil prices.

For Sterling the broader picture therefore matters and the near-term outlook rests on developments in oil and stock markets, while for the Euro the outcome of a looming European Council meeting on financing a coronavirus economic package will be watched over coming hours.

“Sterling rose against the weaker Euro but was little changed versus the Greenback following a spate of negative news on the world economy,” says Joe Manimbo, a foreign exchange analyst at Western Union. “Oil and stocks for now holding their chins higher translated into support for the Pound.”

From a fundamental viewpoint, we note that oil price dynamics have been impacting Sterling negatively of late, via their ability to shift the dial of broader risk sentiment across the market.

Oil has come under scrutiny this week after futures of West Texas Intermediate crude, the North American benchmark, fell below zero amid an unprecedented supply glut that’s pushed storage capacity constraints to critical levels. Many storage facilities have filled up amid the global economic stoppage brought on by the coronavirus but the barrels are still coming thick and fast, which is stoking increased prices for storage space that has exacerbated the pressure on the market for barrels sold and delivered in the here and now.

“As the front month in futures flips over to June, WTI is under $12p/bbl and Brent under $18,” says Kit Juckes, chief FX strategist at Societe Generale. “If freight rates doubled in floating storage, the contango would have to widen to $25.65. This would imply front month Brent and WTI at $11.35\bbl and $7.10\bbl respectively.”

Brent prices followed WTI crude prices lower on Monday and Tuesday, although not nearly as low as the North American benchmark, and the Pound-Dollar rate followed the both south despite the UK being a net oil importer. Lower oil prices are an economic stimulus for the UK in normal times, rather than an economic cost, but the Pound-Dollar rate still has an uncanny correlation with crude prices that are being widely tipped to hit new lows before long as the global economic shutdown continues.

Monday’s episode revealed that it now costs more to store a barrel of oil than it does to buy one for delivery in the here and now, which is a situation that’s not yet reflected in the price of June 2020 crude oil futures. Brent and WTI were trading up around $20 and $13 per barrel overnight for the June month but as the futures expiry date in draws closer in late May there’s a chance downward pressure could build again, and key to whether it does will be daily changes in the cost of storage space. Those freight rates will themselves be highly sensitive to progress among major economies toward easing the ‘lockdown’ measures used to contain the coronavirus.

“It remains to be seen whether the price of Brent will (or will not) be as big a casualty of the current oil market dynamic as its WTI cousin. There are risks that the US supply glut could be fully replicated elsewhere, and it’s not clear that Saudi Arabia’s “involvement” in all of this will dissipate quickly,” says Stephen Gallo, European head of FX strategy at BMO Capital Markets.

Sterling might meanwhile need a negative outcome from the looming European Council meeting in order to avoid a fresh turn lower against the Euro.

The Euro exchange rate complex has been weighed down by the fragmented and fractious European response to the coronavirus crisis and the Euro bloc’s leaders are under immense pressure to agree a common fiscal solution on Thursday, which would very likely be a positive influence on the Euro if it happens.

Financial stability on the ‘periphery’ is at stake in the short-term and the unity, if-not existence of the bloc itself, is at risk on a longer-term horizon.

A falling oil price and European ‘solidarity’ would weigh on the Pound-Dollar rate while lifting the Euro-Dollar rate in what would be a toxic cocktail for the Pound-Euro rate that risks vindicating some bearish views on the outlook for Sterling.

Technical analysts at Commerzbank have tipped the Pound-Euro rate for steep falls in the weeks and months ahead, falls so steep they might potentially see Sterling back at its lowest levels since the 2008 crisis.

A down-day on Thursday, for any reason, would keep the 2020 downtrend in the Pound-Euro rate alive while bringing 2008 lows a step closer.

“EUR/GBP has risen to the April 7 high at .8865 as expected. If it were to be overcome, the March 20 low at .8994 would be back in play,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, referring to the 1.1280 and 1.1118 levels of the Pound-Euro rate respectively.

Jones advocated this week that Commerzbank clients sell the Pound-Euro rate around 1.1412 and is looking for the 1.1118 to give way in the first instance. She’s also tipping the Pound-Euro rate to fall to 1.0200 over the next three weeks or so, where it could remain for months after, but says a move above 1.1519 would negate these forecasts.

Written by James Skinner

Source: Pound Sterling Live

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British pound soars as BOE rules out printing of money

  • British pound rose on reports that Boris Johnson was in the Intensive Care Unit (ICU)
  • The pound rose even as the number of Coronavirus cases increased and Debenhams went into administration.
  • The pound rose after Andrew Bailey, BOE Governor, ruled out printing of money

The British pound rose against the euro and the US dollar as the market ignored news that Boris Johnson’s health was deteriorating. The prime minister, who was diagnosed with Coronavirus two weeks ago, is in an intensive care unit of a London hospital.

While he is alert, government business is being carried out by Dominic Raab, the Foreign Secretary. The British pound index, which measures the strength of the pound against other currencies rose by more than 1%.

More bad news from the UK

The pound rose in a day that the UK received significant bad news. The number of Coronavirus cases continued to rise. According to World of Meters, the UK has confirmed more than 53k cases and more than 5,000 deaths. The number of infections is rising, albeit at a slower rate.

Meanwhile, more UK companies are getting into trouble. Yesterday, Debenhams, the famed retailer, announced that it would move into administration. The company, which has more than 22,000 employees said that it hoped that the action would help it remain afloat. This announcement came a week after BrightHouse and Carluccio’s moved into administration.

Experts believe that many retailers will be forced to go out of business unless the government intervenes. This is because while most of them are not doing any business, they are continuing to accrue costs like insurance and rent. In fact, some retailers like JD Sports, Primark, and Burger King have said that they won’t pay rent. If the cycle continues, it could affect the banking sector, and possibly lead to a bigger financial crisis.

Why the British pound is rising

The reason why the British pound is rising is that Andrew Bailey has committed not to print money to support the economy. Andrew is the new Bank of England governor.

In an opinion piece in the Financial Times yesterday, the governor said that it would not be beneficial for the bank to print money. He argued that this would increase inflation, which would go against the mandate in which the central bank was created. He said:

“Some MPC actions result in the creation of central bank reserves. These reserves are not being created with the aim of paying for the government deficit, as under monetary financing. They are a consequence of independent central bank policy actions to deliver monetary and financial stability.“

A number of central banks, including the Federal Reserve, have been criticised for printing money to support the economy. Two weeks ago, the Fed launched its open-ended QE program. The new program has seen the bank expand its balance sheet by more than $2 trillion. In contrast, the central bank increased its balance sheet by just above $4 trillion in the past financial crisis.

Some quarters in British press and academia criticized this position. The Financial Times dedicated its editorial page arguing that printing money was a valid reason for the bank to print money. The paper argued that while printing money would stir inflation, the bank had tools to lower it. They said:

“If trends restraining inflation go into reverse, central bankers have tools to combat rising prices. They can achieve this by raising interest rates or unwinding QE.“

This thinking was supported by Sir Charles Bean, of the London School of Economics, who argued that printing of money would help prevent large-scale unemployment. He also argued that the plan would not lead to significant inflation since the BOE, unlike the Bank of Zimbabwe, is an independent organization.

Lord King, the former BOE governor, also supported printing of money. He said that that the problem with inflation would happen if the government determined the amount of money to be printed and how it should be used.

By Crispus Nyaga

Source: Invezz

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Bank of England extends emergency liquidity measure

The Bank of England said today it would extend an emergency liquidity measure, the three-month Contingent Term Repo Facility (CTRF), to run until the end of April and it would also hold a one-month CTRF operation each week until 1 May.

The Bank reactivated the facility last week as part of its attempts to keep financial markets running smoothly during the coronavirus crisis.

“The Bank will continue to monitor market conditions carefully and the operation of the CTRF remains under review,” it said in a statement today. “The Bank stands ready to take additional action if necessary.”

The Bank said the move was “a further precautionary step to provide additional flexibility in the Bank’s provision of liquidity insurance over the coming months”.

It said CTRF operations will run in addition to its regular liquidity insurance facilities including the Indexed Long-Term Repo and Discount Window Facility.

Other measures the Bank has taken to tackle the coronavirus-triggered economic crisis include cutting interest rates to a record low of 0.1 per cent to help pump liquidity into the economy.

It has also ramped up bond-buying, pledging to purchase £200bn more debt.

The Bank’s new governor Andrew Bailey took over the top job earlier this month at a time of economic turmoil across the globe.

The economic paralysis that has followed in the wake of the coronavirus outbreak has sent stock markets crashing and left many companies and their workers on the brink.

By James Booth

Source: City AM

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Coronavirus: Bank of England holds rates but paints gloomy economic picture

The Bank of England has kept interest rates on hold at the record low level of 0.1 per cent but signalled it is prepared to take further action to tackle the effects of coronavirus.

The Bank’s monetary policy committee (MPC) today said it “stands ready to respond further as necessary to guard against an unwarranted tightening in financial conditions, and support the economy”.

Threadneedle Street also gave a gloomy assessment of the economy. The MPC said: “The economic consequences of [coronavirus] are becoming more apparent and a very sharp reduction in activity is likely.”

The Bank slashed interest rates to 0.1 per cent at two emergency meetings over the last two weeks. That is the lowest interest rates have ever been in the Bank’s 325-year history.

The rate cuts were designed to pump liquidity into the economy during the coronavirus outbreak. It is also meant to shore up lending and balance sheets.

The BoE has also ramped up its bond-buying, pledging to purchase £200bn more debt. It said today it will continue with this quantitative easing. The Bank added: “If needed, the MPC can expand asset purchases further.”

On top of this, the Bank has cut so-called capital buffers for banks, giving them more cash to lend. It will also buy companies’ short-term debt.

The Bank of England today decided to maintain current policy for the time being. But it said it is prepared to take further action if needed.

The MPC added that it is looking at “the pass-through to banks and building societies’ lending rates of the recent reductions in bank rate”.

Ensuring the extra liquidity reaches the right firms has been a concern of the Bank. It yesterday sent a letter to banks, along with the government and the City watchdog, telling them to keep lending to businesses to ensure that previously viable companies do not fail due to the crisis.

Risk of ‘longer-term damage to the economy’

The Bank of England today gave a stark assessment of the outlook for the UK economy. However, it warned predictions were currently deeply uncertain.

“There is a risk of longer-term damage to the economy, especially if there are business failures on a large scale or significant increases in unemployment,” the MPC said.

“There is little evidence as yet to assess the precise magnitude of the economic shock from Covid-19. It is probable that global GDP will fall sharply during the first half of this year. Unemployment is likely to rise rapidly across a range of economies, as suggested by early indicators.”

Paul Dales, chief UK economist at consultancy Capital Economics, said: “After unleashing unprecedented support in two emergency meetings over the past two weeks, the Bank of England took a break today.”

However, he said that if stress starts to show in the UK’s bond markets, “expect the Bank to do more by providing more liquidity and/or increasing its asset purchases”.

He suggested the BoE might follow the US Federal Reserve and “announce open-ended asset purchases”.

By Harry Robertson

Source: City AM