Bank of England asks banks about negative rate readiness

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The Bank of England asked banks on Monday how prepared they were for zero or negative interest rates, after announcing last month that it was considering lowering rates below zero if necessary.Other central banks have pushed rates into negative territory in an attempt to get banks to lend more, and the BOE said in September it was looking to determine what such a policy might mean in Britain.

“As part of this work, we’re asking for specific information about your company’s current readiness to deal with a zero discount rate, negative discount rate, or staggered reserve pay system. – and the steps to follow to prepare for their implementation, ”BoE Deputy Governor Sam Woods said in a letter to the banks.

The BoE and the lenders must have understood the implications of these moves “since the MPC may see fit to choose various options depending on the situation at the time,” he said, referring to the Monetary Policy Committee of the central bank.

Woods said he wanted to know if there were any technological challenges in implementing zero or negative rates.

“We are also looking to understand if there is potential for short-term solutions or workarounds, as well as permanent system changes,” he said.

The BoE has set a deadline of November 12 – a week after its next monetary policy announcement – for banks to respond.

Last week, money markets pushed back bets that the BoE would cut rates below zero. Investors see rates drop below zero in May 2021, instead of March.

The BOE cut its benchmark rate to a record 0.1% in March to help the economy weather the coronavirus crisis.

Its next move is widely expected to be an increase in its bond buying program by £ 745 billion ($ 972 billion) in November.

The British pound and UK government bonds were little changed on Monday when trading began.

Gov. Andrew Bailey said the BOE’s assessment of negative rates was not a sign it would cut rates below zero, and Woods echoed those comments in his letter.

Banks make money on interest and negative rates hurt profitability, but Wood’s letter makes no specific mention of it, instead focusing on the technical readiness of lenders.

A companion questionnaire asked banks how their retail and wholesale IT systems could cope, and how much time and money it would cost to make permanent short-term “tactical” and “strategic” changes. .

Banks are already under pressure to help households and businesses struggling with the pandemic. They could also face reduced access to European Union markets when the British transition period after Brexit expires.

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