Monday 12 October 2020 8:25 am

Bank of England asks UK banks about readiness for negative rates

The Bank of England has asked UK banks for information about their readiness for zero or negative interest rates, following its announcement last month that it was considering taking rates negative if needed. 

In a letter today, deputy BoE governor Sam Woods told lenders: “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”.

Read more: Bank of England’s Haskel keeps door open to negative rates

He also asked banks about the steps they would need to take to prepare for the implementation of such policies.

Woods said it was important for the Bank, Prudential Regulation Authority, and for lenders themselves to “understand the implications of these potential approaches to implementing a zero or negative Bank Rate”.

“For a negative Bank Rate to be effective as a policy tool, the financial sector — as the key transmission mechanism of monetary policy — would need to be operationally ready to implement it in a way that does not adversely affect the safety and soundness of firms,” Woods wrote.

The central banker said he wanted to know if there were any technological challenges for banks to implement zero or negative rates, and asked firms to complete a survey about their preparedness for such a policy change. 

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The BoE set a deadline of 12 November — a week after its next monetary policy decision on interest rates — for banks to respond to its request. 

Woods echoed recent comments by BoE governor Andrew Bailey by saying the central bank’s look into the impact of taking rates to or below zero was not a sign that it would cut borrowing costs to those levels.

Two BoE policymakers, Silvana Tenreyro and Jonathan Haskel, have recently indicated that they could support a shift to negative rates. 

Tenreyro said the Bank had seen “encouraging” evidence that negative rates could help the British economy recover, while Haskel said that he saw some possible benefits from the policy, but added that it was too soon to reach a conclusion. 

Read more: BoE’s Andy Haldane warns against ‘Chicken Licken’ economic pessimism

BoE chief economist Andy Haldane and deputy governor Dave Ramsden have expressed doubts over whether the policy would be helpful. 

The Bank is widely expected to announce an increase to its bond-buying programme on 5 November in a bid to help Britain’s economy recover from the record slump suffered earlier this year following the coronavirus lockdown.