Bank of England asks banks if ready for negative interest rates

Bank of England asks banks if ready for negative interest rates”

Lead representative Andrew Bailey rehashed his remarks that the BoE's appraisal of negative rates was not a sign that it would cut rates under zero.

While Monday's letter was meant to collect information only on the readiness of banks to a possible change of policy rates, "the Bank and PRA will consider the wider business implications, including on financial stability, safety and soundness of authorised firms and pass-through to the wider economy", it stated.

Interest rates are now at a record low of 0.1% but the BoE has stated it would consider further cuts should the economic situation warrant it. The Bank and PRA will consider the wider business implications, including on financial stability, safety and soundness of authorised firms and pass-through to the wider economy.

Cable still seen more steady on the day around 1.3040-50 now.

"As part of this work, 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", Deputy BoE Governor Sam Woods said in a letter to banks. This letter, however, is seeking information to understand firms' operational readiness and challenges with potential implementation, particularly in terms of technology capabilities.

Despite some mixed elements in the BoE's recent communication, with some divergent views from members of the Monetary Policy Committee and a letter to the banking sector to check it would be prepared if negative rates were imposed, the BoE has been public in admitting it is taking a look at the possibility. Customers temporarily raced to deposit funds at Ulster Bank as they fled negative rates at rivals. The deadline for responses is Thursday 12 November 2020.

The BoE cut its benchmark rate to record low of 0.1 percent in March to help the economy through the coronavirus crisis.

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.

More news: University of Alberta virologist awarded Nobel Prize in Physiology or Medicine

This would effectively mean a charge for holding cash.

The BoE and loan specialists needed to comprehend the ramifications of any such moves "since the MPC may decide to pick different alternatives dependent on the circumstance at that point", he stated, alluding to the national bank's Money related Strategy Board.

A bank that leaves money parked at the Bank of England would have to pay interest instead of being paid interest.

Banks in most eurozone countries charge customers a fee for having accounts, whereas in Britain such charges are rare, and lenders' returns are largely based on the difference between lending and deposit rates.

While the United Kingdom is not familiar with such a decision, negative rates have been implemented in other countries such as Japan and Switzerland.

On 18 September, speculation mounted that the BOE could take interest rates into negative territory for the first time in history next year if the United Kingdom economy weakens further.

Economists have therefore suggested unorthodox monetary policy beyond this, such as quantitative easing to inject money into the financial system, or even "helicopter drops" that give free money direct to people and businesses.

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