The Bank of England asks UK banks how ready they are for negative interest rates

  • The Bank of England has written to British banks, seeking information on how ready they are for monetary policy that adopts negative interest rates.
  • "We are requesting specific information about your firm's current readiness to deal with a zero bank rate," Sam Woods, the central bank's deputy governor, wrote in Monday's letter.
  • The bank survey was not marked as mandatory, but the BoE said it would help give officials a broader understanding of risks and potential issues.
  • The central bank is not currently employing a zero, or negative, interest rate. The base rate is 0.1%.
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The Bank of England appears to be moving closer to adopting negative interest rates, after writing to UK commercial lenders on Monday to ask how ready they are for sub-zero rates.

The letter addressed concerns over operational readiness and challenges with implementation, especially in regard to technological capacity. 

"We are requesting specific information about your firm's current readiness to deal with a zero bank rate, a negative bank rate, or a tiered system of reserves remuneration – and the steps that you would need to take to prepare for the implementation of these," wrote Sam Woods, the bank's deputy governor.

The BoE cut the official borrowing rate to a historic low of 0.1% in March to protect the British economy from the impact of the coronavirus outbreak. 

Now, the bank is conducting a survey to check if there could be wider implications of negative rates for a bank's businesses and its customers. It also plans to seek potential short-term solutions or workarounds, and permanent system changes.

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"A negative policy rate could have wider implications for your firm's business and your customers," Woods wrote. Both the bank and the Prudential Regulation Authority, the BoE's regulator for financial firms, "will consider the wider business implications, including on financial stability, safety and soundness of authorized firms and pass-through to the wider economy."

The BoE will use survey responses to assess banks' readiness and contingency plans.  

The survey was not marked as mandatory, but its aim is to provide the central bank with an accurate and comprehensive understanding of risks and potential issues related to sub-zero rates.

Woods said the survey was not an indication that policymakers were planning to cut rates to zero, or into negative territory, but they needed to know if the financial sector is prepared for such an eventuality.

Previously, the central bank has been cautious about implementing negative rates because of its concern that it would hurt the profitability of commercial banks and lead to a backlash from savers.

"Negative interest rates really are a last resort," Richard Pearson, director at investment platform EQi, said at the time. "But that doesn't mean it won't happen down the line."

The new move could weigh on banks' eagerness for loan, according to Neil Wilson, chief market analyst at Markets.com.

"The idea that negative rates boost lending doesn't wash – banks are not worried about the marginal impact on net interest margins as they are about whether the principal is repaid or not," Wilson said. "And this in the current economic downturn and threat of rising unemployment, this will weigh on banks' willingness to lend."

 

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