The Bank of England has begun a fact-finding mission to see whether banks could cope if the central bank wanted to introduce negative interest rates to support the UK economy.
On Monday the BoE wrote to banks it regulates asking them about their readiness to deal with a zero or negative bank rate.
The BoE said the step was to “assess the appropriateness of a negative official bank rate alongside all of its other tools”. Sterling marginally dipped 0.24 per cent before recovering later in the day.
UK rates have hovered just above zero since the pandemic struck this year, and in previous years some big central banks, such as the European Central Bank, have introduced negative rates to help stimulate their economies.
Andrew Bailey, BoE governor, made it clear last month the BoE was not about to push interest rates below zero in the near future, seeking to damp market speculation that the Bank was about to act.
But with its main interest rate at 0.1 per cent, the Bank said it would begin a “structured engagement” with commercial banks about the implications of going even lower.
Sam Woods, deputy governor and chief executive of the Prudential Regulation Authority, told banks on Monday its letter was “not indicative that the [Monetary Policy Committee] will employ a zero or negative policy rate”.
The Bank wanted to “prevent any unintended operational disruption”, he wrote, while the collection of information was “not asking firms to begin taking steps”.
Bankers have pushed the BoE to provide enough warning to adjust their systems before a negative rate was introduced. UK Finance, the lobby group, has been discussing with the implications with regulators for several months.
People briefed on the talks said the three main areas of concern were whether banks’ core IT systems would be able to handle a switch, what impact it would have on customer contracts that assume a single, positive interest rate, and how companies would communicate the changes to customers.
Bob Wigley, UK Finance’s executive chairman, said the BoE’s move was “understandable”. “In deciding whether to pursue such a measure, the Bank would no doubt have due regard to the implications for banks’ business models and their ability to serve customers which are already impacted by Covid-19,” he said.
NatWest’s Ulster Bank subsidiary highlights some of the potential concerns about “technology capabilities” raised by the BoE.
The unit now charges negative interest rates to some business customers in the Republic of Ireland but initially found its ageing computer systems were unable to routinely charge customers for deposits. Customers temporarily raced to deposit funds at Ulster Bank as they fled negative rates at rivals.
While Monday’s letter was intended to collect information only on the readiness of banks to a possible change of policy rates, “the Bank and PRA will consider the wider business implications, including on financial stability, safety and soundness of authorised firms and pass-through to the wider economy”, it stated.
Banks must reply to the request for information by November 12, the Thursday after the next monetary policy announcement.
Analysts expect the BoE to increase its bond-buying programme in a meeting on November 5 in a further attempt to support the UK’s fragile economic recovery.
The pressure for more action from the BoE increased last week as data showed that UK economic growth faltered in August even before a surge in infections in September and as restrictions were tightened.