However, even without negative interest rates, real yields--a calculation of the return on bonds that accounts for inflation--"remain a drag" on the pound, he says. Nomura has a long EUR/GBP position, forecasting it to rise to 0.92, from 0.9000 currently. Mobility in the U.K. hasn't yet recovered to the extent of mainland Europe, as its policy response has been "less aggressive than in Europe" while incidences of coronavirus are increasing, he says.
More BOE QE 'Remains a Possibility' by Year-End
More Bank of England quantitative easing "remains a possibility by year end," says Vivek Paul, chief investment strategist for the U.K. at BlackRock Investment Institute. The BOE left interest rates and its QE target unchanged Thursday, despite highlighting "material uncertainty around the UK economy," he says.
The decision follows a level of financial and monetary stimulus that has been "nothing short of a policy revolution." However, the unwinding of the government's furlough scheme--due to end in October--will likely see unemployment rise materially towards year-end in some sectors, Paul says. "We continue to watch for emerging signs of financial vulnerabilities and any permanent scarring of productive capacity, as well as the possibility of no Brexit deal."
BOE Would Choose More QE Over Negative Rates
The Bank of England is more likely to expand quantitative easing than implement negative interest rates if the U.K. economy weakens more than the central bank expects, Investec says. "We expect that this will be something the Monetary Policy Committee will consider in November with the current quantitative easing total set to be reached around the turn of the year and as such net asset buying set to be paused at this point," Investec's Victoria Clarke says.

BOE's Bailey Says Negative Rates are an Option if Needed
The Bank of England will consider negative interest rates to stimulate the economy if needed but doesn't currently plan to adopt it as a policy, Governor Andrew Bailey says. "It's absolutely sensible to have them in the toolbox but we aren't going to use them at the moment," Bailey says in a press conference Thursday after the BOE said it would leave its benchmark rate at 0.1%.
The effectiveness of negative rates "critically depends" on the structure of the banking system and are probably more effective in an established upswing than a downswing, Bailey says. No country has adopted negative deposit rates for retail customers and the U.K. has a large share of retail deposits, he says.
BOE's Statement 'Was a Far Cry' From Tone in May

The BOE said some high-frequency data has shown a strong rebound including spending and the housing market, though acknowledged that business investment remains lackluster and bankruptcies may yet increase due to the coronavirus crisis, Schlossberg notes. GBP/USD is last up 0.4% at 1.3169, having earlier hit a 5-month high of 1.3186.
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By — Don Quixote