Low rates hit bank stability

Tim Wallace
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LOW interest rates might be designed to help boost the economy, but can also hurt banks’ profits and so have serious implications for financial stability, according to Bank of England research out yesterday.

That means other macroprudential policy tools are required to stop efforts to hit one policy goal – the inflation target – from impacting on another – financial stability, the report said.

The paper also found that a sudden rise in the base rate can impact on bank profits, as short-term deposit prices may change more quickly than long-term loan prices, a friction that stops banks taking immediate advantage of higher interest rates, hitting profits.

However once that squeeze fades, profits tend to be higher as the interest rate is now higher.

Because “short run profitability is a major determinant of bank capital, it follows that monetary policy may have implications for the resilience of the financial system,” the report explained.

As a result, it suggests using macroprudential tools to tackle the interaction between the policy goals.