Businesses and individuals across the world have been impacted by Covid-19
Negative interest rates dominated sterling this week, costing the pound an average of 0.8%, sending it a cent and a third lower against the euro. A week ago the Bank of England governor refused to rule out the possibility of negative interest rates and sterling was almost unchanged on the day. He refused once again and the pound lost ground to every other major currency, falling by an average of 0.7%. It cannot have been the manner of Andrew Bailey’s refusal. He was talking to Parliament’s Treasury Committee and measuring his words carefully as a central banker should: “We’re not ruling it in, but we’re not ruling it out.” However, there was a striking new context to the governor’s remarks - The government borrowed money at a negative rate of interest.
Midweek the Debt Management Office sold £3.8 billion of three-year gilts at a record low yield of -0.003%. Whoever bought the gilts will be paying the Treasury threepence a year to look after every £100 of their money. Although a negative gilt yield does not automatically translate into a negative Bank Rate, investors were inclined to bet that it might, especially after inflation almost halved from 1.5% to 0.8%.
Date out of the UK did not paint a pretty picture, with retail sales showing a record 18.1% monthly fall in April. Neither did Chancellor of the Exchequer Rishi Sunak, saying, “We are likely to face a severe recession, the likes of which we haven’t seen,” to the House of Lords Economic Affairs Committee on Tuesday. Still, alcohol sales were up 2.3% in April. In other news Environment Minister George Eustice’s suggestion that Britons should apply for jobs as fruit pickers caused the “Pick for Britain” website to crash, and Brexit was back with sterling lower after a report suggested that the UK government is prepared to walk away from trade negotiations.
The euro’s big news story came early in the week, with the German Chancellor Angela Merkel and the French President Emmanuel Macron proposing a shared €500 billion common recovery fund for the EU. The money would be backed by those countries most able to contribute and distributed – as grants, not loans – to those most in need. The European Commission would leverage its top-drawer AAA credit rating to borrow the money at a lower rate than most individual countries could achieve.
The scheme is not yet a done deal though, as it must be approved by every member government and some of them remain hostile to shared debt. However, Germany’s involvement and support was positive for the euro, which is an average of 0.4% firmer and a cent higher against the US dollar and more than 1% firmer against the safe-haven yen and franc. Observers of the Eurozone over the last 20 years will have noted that there are limits to an extent, of intergovernmental cooperation. One of the red lines historically for some, including notably Germany, has been joint and collective cross-border debt, so with Merkel behind the common recovery fund, such red lines may have been erased.
Inflation wasn’t just the preferred topic in the UK, indeed in the euro zone where rates are already negative, inflation slowed from 0.7% to 0.3% in April. At the end of last week
Germany announced its economy had shrunk by a provisional 2.2% in Q1, with the EU also reporting a 3.8% contraction for the same period. ZEW’s measure of economic sentiment was an improvement though, for a second successive month, to a five-year high of 51.
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