Bank of England

BoE tells banks to prepare for negative interest rates

Following an information request on 12th October 2020 from the Prudential Regulation Authority (PRA) to understand firms’ operational readiness to implement a zero or negative bank rate, the authority has provided feedback to firms.

In a letter dated 4th February 2021, the PRA said that the majority of firms would need to make some changes to systems and processes in order to put into effect either a strategic or tactical solution to deal with a possible zero or negative bank rate.

The PRA said that the letter was not indicative that the MPC will employ a zero or negative policy rate.

The letter revealed that most companies would be able to implement tactical solutions to accommodate a negative bank rate within six months, without material risks to safety and soundness.

The authority will now engage with PRA-authorised firms on their development of tactical solutions, aiming to get them ready to be in a position to be able to implement a negative bank rate at any point after six months.

While many wholesale banking businesses have reported they are able to accommodate negative rates for their wholesale business, largely due to experience of dealing with negative interest rates in other countries, a lot of retail banking companies reported that their legacy retail systems were not built to accommodate the potential change.

According to them, most shorter-term tactical solutions would take up to six months to implement, while longer-term strategic solutions would take between 12 and 18 months.

Several firms reported that the area where this would require most preparatory work would be on tracker mortgages, where customer rates are directly determined by the bank rate.

They also reported that implementing a tactical solution for a negative rate would also result in varying levels of workarounds in areas such as customer communications, treasury systems and financial reporting tools.

Currently, the bank rate remains at 0.1%, as the MPC voted unanimously to keep the rate announced in March 2020.

Nigel Green, chief executive and founder of independent financial advisory organisation deVere Group, said: “It is clear that, as the bank tries to bolster the pandemic-stricken British economy, negative interest rates remain part of the ‘tool kit’.

“Question marks remain as to whether negative rates would achieve the primary aim of supporting the economy — this is because the move could be viewed by consumers and investors that the economy is in a perilous position and, as a result, trigger a serious drop in consumer and investor demand.”

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