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

• The Bank of England has written to British banks seeking information on their readiness for a monetary policy that adopts negative interest rates.
• “We are requesting specific information on your company’s current readiness to deal with a zero bank rate,” wrote Sam Woods, deputy governor of the central bank, in Monday’s letter.
• The banking survey was not marked as mandatory, but the BoE said it would help provide officials with a broader understanding of potential risks and problems.
• 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 prepared they are for subzero rates.

The letter addressed concerns about operational readiness and challenges with implementation, especially as it relates to technological capacity.

“We are requesting specific information about your company’s current readiness to deal with a zero bank rate, a negative bank rate, or a tiered reserve remuneration system, and the steps you should take to prepare for implementing these.” wrote Sam Woods, deputy governor of the bank.

The Bank of England cut the official interest rate to a record 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 see if negative rates could have broader implications for a bank’s business and its customers. He also plans to look for possible short-term or alternative solutions, and permanent changes to the system.

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“A negative policy rate could have broader implications for your company’s business and your customers,” Woods wrote. Both the bank and the Prudential Regulation Authority, the BoE’s regulator for financial companies, “will consider the broader business implications, including financial stability, safety and soundness of licensed companies and carry-over to the wider economy.” .

The BoE will use the survey responses to assess banks’ preparedness and contingency plans.

The survey was not marked as mandatory, but it is intended to provide the central bank with an accurate and comprehensive understanding of the potential risks and problems associated with subzero 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 had been cautious about implementing negative rates due to concerns that it would hurt the profitability of commercial banks and provoke a backlash from savers.

“Negative interest rates are really a last resort,” Richard Pearson, director of investment platform EQi, said at the time. “But that doesn’t mean it won’t happen in the future.”

The new measure could influence banks’ enthusiasm for borrowing, according to Neil Wilson, chief market analyst at Markets.com.

“The idea that negative rates drive lending is not washed away: banks are not concerned about the marginal impact on net interest margins, but whether or not principal is repaid,” Wilson said. “And this, in the current economic recession and the threat of rising unemployment, will weigh on the willingness of banks to lend.”

The pound fell 0.2% against the dollar at $ 1.30 on Monday.

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