BoE asks United Kingdom lenders if they are ready for negative interest rates

BoE asks United Kingdom lenders if they are ready for negative interest rates

The BOE said in its letter on Monday that banks had to understand the implications of a move to negative interest rates "since the MPC [Monetary Policy Committee] may see fit to choose various options based on the situation at the time".

In a letter dated 12 October, deputy governor Sam Woods asked all United Kingdom lenders for information on their operational readiness for a 0% or negative bank rate.

"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", said Sam Woods, deputy governor at the BoE, in a letter to "specific firms".

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

The potential upside to negative rates is that people will see that they are not earning money by hoarding their cash in the bank so they will go out and spend it instead, stimulating the economy.

Money markets last week pushed back bets that the BoE would cut rates below zero.

"This engagement is not asking firms to begin taking steps to ensure they are operationally ready to implement a negative Bank Rate".

The letter is seeking information to understand lenders' operational readiness and challenges "particularly in terms of technology capabilities".

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The BoE set a deadline of November 12 - a week after its next monetary policy announcement - for banks to respond.

"It looks as though there are some clear ideological disputes among rate-setters that needs to be worked out over the autumn, implying as [governor] Andrew Bailey suggested last week that negative rates are not likely on the near horizon, albeit that they are being considered activity".

Bob Wigley, executive chairman of UK Finance, an industry body representing more than 250 financial institutions, said he expected the BOE to consider the "implications for banks' business models and their ability to serve customers which are already impacted by Covid-19".

These were the details of the news BoE asks banks how ready they are for sub-zero rates for this day.

How do negative central bank rates work?

. A negative interest rate could theoretically result in savers being charged to hold deposits in their bank accounts, but commercial considerations, such as the need to attract deposits, might prevent banks from passing on all their costs to customers.

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

That has delivered the concept of the zero lower bound, a point where cutting interest rates no longer stimulates the economy.

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