Negative interest rate risk emerges with 78pc chance of cut next week

Bank-of-England-BoE-Treausury-700x450.jpgSwap markets are pricing in a 78 per cent chance of a rate cut next week, and predict we could possibly see negative interest rates by the end of the year, economists say.

Overnight index swaps, which are interest rate swaps in which the variable overnight rate is exchanged for a fixed rate, are currently implying a 78 per cent chance of a cut next week. They are implying an 86 per cent chance of a cut by August, and a 27 per cent chance rates will be 0 per cent by then.

Bloomberg  World Interest Rate Probability table - MPC meetings
Bloomberg World Interest Rate Probability table – MPC meetings

Hargreaves Lansdown says markets are now pricing in an 89 per cent chance of a cut by December, with a 34 per cent chance rates will be 0 per cent and an 8 per cent chance rates will be negative by then.

Ten days ago swap markets were predicting a 50 per cent chance of an interest rate cut in July, a 65 per cent chance of a cut by August, and an 80 per cent chance of a cut by the end of the year. However, the chance of a rate cut a year from now has receded from 15 per cent 10 days ago to 12.5 per cent today.

Hargreaves Lansdown senior economist Ben Brettell says: “Following on from Mark Carney’s strong hint last week that rates will be cut this summer, financial markets are now pricing in a 78 per cent chance that this will happen next Thursday. Initially August had looked more likely, but with economic data deteriorating and markets still nervous, it now looks probable the MPC will adjudge that immediate action is warranted.

Since the referendum Mark Carney has shown he’s very much on the front foot trying to deal with the economic implications of Brexit. Last week he expressed confidence the UK economy would prove resilient enough to deal with the challenge, but also said that the Bank’s forecast of slowing growth in the event of a vote to leave the EU had now become its central case, and that he believed rates would have to be cut over the summer. Yesterday he announced the Bank would use its new ‘macroprudential’ powers, cutting the amount of capital required to be held by banks in an attempt to stimulate lending.

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