By Steve Goldstein
The pound rose on Thursday, after the Bank of England tried to be as cautious as possible in saying it was time to start preparations for adding negative interest rates to its tool kit.
The pound /zigman2/quotes/210561263/realtime/sampled GBPUSD +0.0145% moved to $1.3696 from $1.3571 after the unanimous decision, which also included a call to keep interest rates at 0.1% and maintain its asset-purchase plan.
“While the Committee was clear that it did not wish to send any signal that it intended to set a negative Bank Rate at some point in the future, on balance, it concluded overall that it would be appropriate to start the preparations to provide the capability to do so if necessary in the future,” the central bank said.
The central bank also said that it would take at least six months for banks to be prepared.
“Bottom Line: The possibility of negative rates has grown but it would take a significant event to prompt its use,” said economists at BMO Capital Markets.
Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, added that the Bank of England also revised higher its inflation forecast — so that it is more likely to reach its 2% target if it stands pat.
One other change the Bank of England made was to reconsider the appropriate way of tightening. The current plan is not to reduce its balance sheet until rates reach 1.5%.
The yield on the 2-year gilt /zigman2/quotes/211347169/realtime BX:TMBMKGB-02Y +13.90% moved to -0.03% from -0.09% on Wednesday, and Lloyds Banking Group /zigman2/quotes/202285510/delayed UK:LLOY +1.39% and NatWest Group /zigman2/quotes/209265718/delayed UK:NWG +1.92% rose, both signs that markets see a declining possibility of negative rates.