For our first commentary of the year, rather than discuss global events, we shall focus our attention on developments in the UK. I am sure that you have all read quite enough about GameStop and Elon Musk and his band of merry men (and women) at this point…
Yesterday we heard from the Bank of England. As (broadly) expected, predictions became reality with an unanimous decision to hold the base rate at 0.10%. In addition, the existing programme of UK government bond purchases was maintained at a target of £875Bn along with £20Bn dedicated to financing investment grade corporate debt.
GDP for Q4 2020 is expected to come in better than originally forecast in November. However, given the level of restrictions imposed since, Q1 2021 is likely to enter contractionary territory once again. Over the course of this year, it is believed that growth will return, and at pace, along with inflation which is set to reach 2% (the target rate) in Spring, following rising energy prices and the end of the VAT holiday. Interest rates are not going to be going up, as one might expect under more stable conditions, rather the bank will look to hold rates lower until the economy reaches full capacity. It does seem though that at least they should not be going down, and there is a good chance we escape the negative base rate trap.
More is required for rates to rise. The risk to the labour market has become elevated. Revised figures predict peak unemployment hitting the island in Q3, reaching 7.8% before starting to fall again. Overall, 2021 GDP has been cut from 7.5% to 5%. Whilst further work is being done on preparing banks for negative rates, this is not expected to be completed for “at least six months”. It is being hailed as a tool not for this crisis rather an exercise of futureproofing. Both Sterling and the Government bond yield curve rose following yesterday’s MPC meeting. Futures implied rates have entirely retreated from pricing negative rates as of this morning.
GBP-denominated money market fund rates, on the other hand, have hurtled toward zero, with momentum having already built up over the past months, along with speculation of when, rather than if levels will breach and enter sub-zero territory. It is hard to see how sufficient fees can continue to be waived to protect against principal losses, given that we now face a prolonged period of low yields and the capitulation of what was already a compressed credit curve.
We have also had reports of several institutions slashing GBP deposit rates as the calendar flipped into February, to add to the increasing number of banks international banks that have been charging for GBP deposits for some time now.
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