BoE to decide if interest rates should go negative
17 December 2020 UK
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The Bank of England’s monetary policy committee is meeting today to discuss whether interest rates should remain at 0.1 percent or be slashed into negative territory.
BoE said on 5 November that interest rates would remain at a fraction above zero but the committee has also been preparing to overcome potential obstacles to negative interest rates that would allow further cuts from the current 0.1 percent base rate.
Market observers are speculating that negative interest rates will be introduced in 2021 as part of the UK economy's post-pandemic recovery, particularly if the rate of economic growth and national productivity continues to slow as a result of a third wave of COVID-19 coupled with a no-deal Brexit.
Securities lending participants are particularly concerned about the possibility of negative yields on cash collateral reinvestment funds and repos and how that could impact the economics of lending securities.
This is especially true in markets with a significant cash-collateral market, such as the US, but would also impact those that prefer non-cash collateral, such as the EU and UK.
David Lewis, senior director of securities finance at FIS, says: “Logic suggests that negative interest rates would drive an increase in the use of non-cash collateral as cash is no longer king.
“In reality, not everyone will be able to switch to non-cash collateral overnight, so there will be a lag and some may never migrate fully, possibly even dropping out of the market altogether.”
According to the Risk Management Association’s securities lending council in a recent whitepaper, negative interest rates could affect every aspect of securities lending, including borrower demand, investment valuation, taxation, accounting and operating models.
Elsewhere, FJP Investment recently surveyed 1,000 UK-based investors to reveal their thoughts on the prospect of negative interest rates. The research found that 49 percent of respondents believe the introduction of negative rates would harm their investments, while 40 percent would restructure their portfolios if negative rates are announced.
Jamie Johnson, CEO of FJP Investment, says: “Investors are clearly worried about the impact negative interest rates could have on their portfolios. While the BoE is yet to play this card, there remains a great deal of speculation that negative rates could be around the corner.
“If COVID-19 cases cannot be brought under control and strict lockdown measures remain, the recovery of the UK economy is going to be significantly hindered. In such a situation, we could expect negative interest rates to come into play sooner rather than later. In any case, investors must start preparing now to avoid any negative repercussions on their portfolios.”
Fluctuating interest rates could be a major trend of 2021, and a deep dive on how negative interest rates might affect global securities lending markets is available in the latest issue of Securities Finance Times.
BoE said on 5 November that interest rates would remain at a fraction above zero but the committee has also been preparing to overcome potential obstacles to negative interest rates that would allow further cuts from the current 0.1 percent base rate.
Market observers are speculating that negative interest rates will be introduced in 2021 as part of the UK economy's post-pandemic recovery, particularly if the rate of economic growth and national productivity continues to slow as a result of a third wave of COVID-19 coupled with a no-deal Brexit.
Securities lending participants are particularly concerned about the possibility of negative yields on cash collateral reinvestment funds and repos and how that could impact the economics of lending securities.
This is especially true in markets with a significant cash-collateral market, such as the US, but would also impact those that prefer non-cash collateral, such as the EU and UK.
David Lewis, senior director of securities finance at FIS, says: “Logic suggests that negative interest rates would drive an increase in the use of non-cash collateral as cash is no longer king.
“In reality, not everyone will be able to switch to non-cash collateral overnight, so there will be a lag and some may never migrate fully, possibly even dropping out of the market altogether.”
According to the Risk Management Association’s securities lending council in a recent whitepaper, negative interest rates could affect every aspect of securities lending, including borrower demand, investment valuation, taxation, accounting and operating models.
Elsewhere, FJP Investment recently surveyed 1,000 UK-based investors to reveal their thoughts on the prospect of negative interest rates. The research found that 49 percent of respondents believe the introduction of negative rates would harm their investments, while 40 percent would restructure their portfolios if negative rates are announced.
Jamie Johnson, CEO of FJP Investment, says: “Investors are clearly worried about the impact negative interest rates could have on their portfolios. While the BoE is yet to play this card, there remains a great deal of speculation that negative rates could be around the corner.
“If COVID-19 cases cannot be brought under control and strict lockdown measures remain, the recovery of the UK economy is going to be significantly hindered. In such a situation, we could expect negative interest rates to come into play sooner rather than later. In any case, investors must start preparing now to avoid any negative repercussions on their portfolios.”
Fluctuating interest rates could be a major trend of 2021, and a deep dive on how negative interest rates might affect global securities lending markets is available in the latest issue of Securities Finance Times.
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