European session review: GBP appreciates as investors push back expectations of negative rates in UK

GBP continued to appreciate against its major rivals in the European session on Wednesday, as investors pushed back their expectations of the Bank of England (BoE) taking interest rates into negative territory after Wednesday's comments by the BoE's governor Andrew Bailey.

Speaking to business leaders at a virtual event in Scotland on Tuesday, Bailey said that the negative rates were a controversial subject as there were “lots of issues” with cutting interest rates into negative territory. According to BoE's governor, the negative rates would complicate the banks’ efforts to be profitable and force them to restrict lending. Bailey added, however, that the BoE's policymakers would continue studying negative rates. He also acknowledged that Britain’s economy was in a “very difficult period” due to the recent Covid-19 lockdown, but noted that the impact of the latest coronavirus restrictions appeared less severe than that in spring of 2020.

Bailey's remarks on negative rates made market participants push back their forecasts for when Britain’s central bank might cut rates. Market participants now expect that a sub-zero rate cut could come in June. Before Bailey’s speech, those expectations were for May.