The pound rose after the Bank of England announced it would directly finance UK government borrowing, bypassing the bond market. Meanwhile news of Prime Minister Boris Johnson’s improving health in hospital supported the gains.
The ongoing recovery in global risk sentiment on hopes that the virus spread is reaching a peak saw the Swiss franc pullback modestly.
GBP/CHF was up by 25 pips (+0.22%) to 1.2061 as of 3pm GMT.
The currency pair mostly traded in a horizontal trading range with 1.205 as a mid point.
That follows +0.70% rise on Wednesday, bringing a week-to-date performance of +0.16%.
Pound gains despite currency debasement
The pound gained ground on Thursday, mostly as a result of the improving market mood. In doing so it managed to brush off the risk of further debasement by the Bank of England (BOE).
On Thursday the Bank of England announced a new measure to directly finance the government, bypassing the usual channel of going via bond markets.
As a quick explainer the usual process is that if the government wants to borrow money because it has not raised enough through taxes, it will do so by issuing government bonds in a debt auction. Banks then bid for the debt securities, which in the case of the UK are called gilts. The government will then pay the bondholders the coupon on the bond on a regular basis.
Swiss franc slips during stock market rally
But government bond markets had hit some turbulence in March, meaning the usual forces of supply and demand were not quite functioning. Bondholders were just selling out to raise cash.
What the BOE is doing is called ‘Monetary financing’ which the IMF define as running a fiscal deficit (or a higher deficit than would otherwise be the case) which is not financed by the issue of interest-bearing debt, but by an increase in the monetary base.
Put simply the new procedure would be that the Bank of England would print money and hand it over to the government.