- The Bank of England has written to British banks seeking information on how ready they are for a monetary policy that accepts negative interest rates.
- “We want specific information about your company’s current readiness to deal with a zero bank interest rate,” Sam Woods, the bank’s deputy governor, wrote in a letter Monday.
- The bank survey was not marked as mandatory, but the BoE said it would help employees better understand the risks and potential problems.
- The central bank does not currently use a zero or negative interest rate. The base rate is 0.1
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The Bank of England appears to be approaching negative interest rates after turning to UK commercial lenders on Monday to ask how much they are willing to pay below zero.
The letter addressed concerns about operational readiness and implementation challenges, especially with regard to technological capacity.
“We want specific information about your company’s current readiness to deal with a zero bank interest rate, a negative bank interest rate or a differentiated reserve remuneration system – and the steps you need to take to prepare for their implementation,” Sam wrote. Woods, deputy governor of the bank.
The BoE cut the official interest rate on the loan to a historic level of 0.1% in March to protect the British economy from the effects of the coronavirus outbreak.
The bank is now conducting a study to see if there could be a wider effect of negative interest rates on the bank’s business and its customers. He also plans to look for potential short-term solutions or solutions and permanent changes in the system.
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“Negative policy rates can have wider implications for your company’s business and your customers,” Woods wrote. Both the bank and the Prudential Regulatory Authority, the BoE regulator for financial firms, “will consider the wider business implications, including on the financial stability, security and stability of authorized firms and the transition to the wider economy.”
The BoE will use the responses to the surveys to assess banks’ preparedness and contingency plans.
The study is not marked as mandatory, but its purpose is to provide the central bank with an accurate and comprehensive understanding of the risks and potential problems associated with interest rates below zero.
Woods said the survey is not an indication that politicians plan to cut interest rates to zero or negative territory, but they need to know if the financial sector is prepared for such an opportunity.
Previously, the central bank was cautious in applying negative interest rates due to fears that this would harm the profitability of commercial banks and lead to a reaction from savers.
“Negative interest rates are really a last resort,” said Richard Pearson, director of the EQi investment platform. “But that doesn’t mean it won’t happen on the line.”
The new move could weigh on banks’ willingness to lend, according to Neil Wilson, chief market analyst at Markets.com.
“The idea that negative interest rates stimulate lending is not washed away – banks are not worried about the marginal impact on net interest margins, as they are whether the principal is paid or not,” Wilson said. “And with the current economic downturn and the threat of rising unemployment, this will weigh on banks’ willingness to lend.”
The pound fell 0.2% against the dollar to $ 1.30 on Monday.
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