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Bank of England quizzes banks over preparation for negative interest rates

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  • 12/10/2020
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Bank of England quizzes banks over preparation for negative interest rates
The Bank of England (BoE) has written to lenders to ask if they are ready for a zero or negative interest rate scenario.

 

Banks are required to fill out a survey detailing how a zero or negative bank rate will affect services, how reliant they are on third parties to accommodate the change, as well as the time and costs needed to implement the rate change. 

In the letter, Sam Woods, deputy governor and CEO of the Prudential Regulation Authority (PRA) said the central bank had been considering negative rates as a policy tool since the 2008 financial crisis and said it was important for it to understand the implications. 

The bank said it was also considering how a tiered approach to negative rates would work in order to reserve renumeration. 

Woods wrote: “We are also seeking to understand whether there may be potential for short-term solutions or workarounds, as well as permanent systems changes.” 

BoE and the PRA will share the responses received to help it build a contingency plan and assess how prepared banks are for the scenario. 

Response are voluntary and banks have until 12 November to submit answers. 

The possibility of the bank base rate falling into the negative has been speculated since the UK went into lockdown to minimise the spread of the coronavirus, and the rate was cut to a historical low of 0.1 per cent.

The BoE has hinted at the use of negative rates but has said the impact it might have on banks and the wider economy will need to be reviewed.

Most recently, BoE deputy governor Sir Dave Ramsden said negative rates would not be the best way to stimulate the economy and suggested the Monetary Policy Committee were not planning to use to resort to this strategy anytime soon.

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