The Bank of England has told banks to be ready for the possibility of negative interest rates within six months.
Minutes from the Monetary Policy Committee’s latest meeting show rate setters instructed the Prudential Regulation Authority (PRA) to tell banks to prepare.
“While the Committee was clear that it did not wish to send any signal that it intended to set a negative Bank Rate at some point in the future, on balance, it concluded overall that it would be appropriate to start the preparations to provide the capability to do so if necessary in the future,” the minutes said.
“The MPC therefore agreed to request that the PRA should engage with PRA-regulated firms to ensure they commence preparations in order to be ready to implement a negative Bank Rate at any point after six months.”
The PRA, which regulates the banking sector, published a letter on Thursday sent by its chief executive Sam Woods to bank chief executives, telling them to begin work. Woods had solicited banks’ views on the feasibility of the policy last October.
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The pound spiked against the euro (GBPEUR=X) and dollar (GBPUSD=X) in the wake of the publication of the minutes. Some in the City had speculated that the MPC would endorse negative rates and signal their intention to adopt them, but the statements fell well short of this.
“Negative interest rates are still not a done deal,” said Laith Khalaf, a financial analyst at stockbroker AJ Bell. “The default position for the Bank now is to sit on its hands, unless there is a clear and present need for more monetary stimulus.”
The Bank of England cut interest rates to an all-time record low of 0.1% last March as the COVID-19 pandemic first struck. Governor Andrew Bailey revealed the bank was exploring the feasibility of negative interest rates last May.
Those who favour negative rates argue they can help stimulate economic growth by encouraging investment. Critics say the policy is not very effective and damages the banking system by challenging its core business model.
Banks have been scrambling to prepare for the possibility of negative interest rates, with many warning they are not yet ready. A senior Santander executive told MPs in December that it could take up to 18 months to prepare the bank’s systems.
“The PRA’s engagement with regulated firms had indicated that implementation of a negative Bank Rate over a shorter timeframe than six months would attract increased operational risks,” the MPC minutes said.
Comments on negative rates made by Bank of England executives over the last few months have been mixed, making it unclear whether the Monetary Policy Committee would look to adopt the policy when it is able to be deployed. Bailey has consistently said he wants to have negative rates available as a tool should the Bank need it.
“We do not expect the BoE to take rates into negative territory,” said Dean Turner, an economist at UBS. “In our view, they will remain on hold for the year.”
Negative rates were adopted across Europe in the wake of the 2008 financial crisis and remain across the eurozone today.
Shares in UK banks were little changed by the Bank of England’s announcement. Most were lower on the day.
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