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- Bank of England has written to British banks asking for information on how much they are prepared for the monetary policy of adopting negative interest rates.
- “We are making a definite request about your pay firm’s current readiness to deal with zero bank rates,” Central Bank Deputy Governor Sam Woods wrote in a letter on Monday.
- The bank survey was not marked as mandatory, but the BOE said it would help give officials a broader understanding of the risks and potential issues.
- The central bank is not currently employing zero or negative, interest rate jobs. 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 a letter to UK commercial lenders on Monday asking how much they are prepared for sub-zero rates.
The letter addresses concerns about challenges with operational readiness and implementation, particularly technical capabilities.
“We request specific information about your pay firm’s current readiness to deal with a zero bank rate, a negative bank rate, or a tiered system of reserve pay – and what steps you need to take to prepare for its implementation.” The bank’s deputy governor, Sam Woods, wrote.
To protect the British economy from the effects of the coronavirus outbreak, the BoE cut its official historic low of 0.1 in March.
Now, the bank is conducting a survey to examine whether negative rates could have a wider impact on the bank’s businesses and its customers. It also plans to take on potential short-term solutions or workarounds and changes to the permanent system.
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“Negative policy rates can have a far-reaching effect on your firm’s business and your customers,” Woods wrote. The BOE’s regulator for financial companies, both the bank and the Prudential Regulatory Authority, will consider “the broader implications, including financial stability, security and the rigidity of authorized companies, and the transition to a wider economy.”
The BO will use the survey responses to assess the bank’s readiness and contingency plans.
The survey was not marked as mandatory, but was intended to provide the central bank with an accurate and comprehensive understanding of the risks and potential issues related to sub-zero rates.
Woods said the survey is not an indication that policymakers are planning to reduce rates to zero or negative territory, but they need to know if the financial sector is prepared for such a situation.
Earlier, the central bank was wary of enforcing its negative rates as it was concerned that it would hurt the profitability of commercial banks and the savers would react.
“Negative interest rates are really a last resort,” said Richard Pearson, director of investors’ platform Equi. “But that doesn’t mean it won’t be down the line.”
According to Neil Wilson, chief market analyst at Markets.com, the new move could help keep banks’ interest in loans in check.
Wilz said the idea is that negative rates do not encourage lending – banks are not concerned about the marginal impact on net interest margins because they are about whether principal is paid. “And this underscores the debt preparedness of these banks in the face of the current economic downturn and rising unemployment.”
The pound fell 0.2% to 1.30 against the dollar on Monday.
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