(Bloomberg) — Want the lowdown on European markets? In your inbox before the open, every day. Sign up here.
Investors have begun betting that the Bank of England will join the European Central Bank in cutting interest rates below zero.
Traders bought more than 21,000 option contracts in the past month that will pay out if the BOE delves into negative territory by March 2021. The bets will succeed if the central bank buckles under the twin pressures of Brexit and a global economic slowdown and eases policy to spur growth.
The BOE kept its benchmark rate steady at 0.75% last week and said it was less optimistic than usual about the economic outlook, citing risks tied to Britain’s plan to exit the European Union by the end of October.
The option trades reveal speculation that Britain is heading for recession that would force the bank’s hand, dragging down bond yields and fueling a rally in gilts. Sub-zero cuts would bring the U.K. more in line with the euro zone, Switzerland and Japan. The positioning stands in contrast to BOE Governor Mark Carney’s recent comments that the effective lower bound for U.K. interest rates is close to, but a little above, 0%.
Talks between Britain and the EU are deadlocked after Prime Minister Boris Johnson sought to renegotiate the current deal. Brussels refused, heightening fears of a no-deal departure and its effect on the U.K. economy.