Bank Of England plan to impose economy destroying Negative Interest Rates (21May20)
On Monday, the Bank of England asked lending institutions how prepared they are for zero or negative interest rates..
Other central banks cut rates to negative in an attempt to stimulate financial institutions to lend more. Bank of England said in September it was exploring a similar approach for the UK economy.
«As part of this work, we ask for specific information about your company’s current readiness to deal with a zero bank rate, negative bank rate, or tiered reserve reward system, and the steps you need to take to prepare for this.», – said the Deputy Governor of the Bank of England Sam Woods in a letter to banks.
The Bank of England and lending institutions must understand the implications of any such steps, «as the MPC may find it appropriate to select different options depending on the situation at the time», – he said, referring to the Central Bank‘s Monetary Policy Committee.
Woods said he would like to know if there are any technological challenges for introducing zero or negative rates..
«We also strive to understand if there is potential for short-term solutions or workarounds, as well as for permanent systemic changes.», – he said.
The Bank of England has set a deadline for a response from banks on November 12, which will be one week after the next announcement of monetary policy decisions.
Money markets last week stopped waiting for the Bank of England to cut rates below zero soon. Investors predict rates will drop below zero in May 2021, not March.
Bank of England cut base rate to record low of 0.1% in March to help economy weather coronavirus crisis.
The next step is expected to increase the bond buying program by £ 745bn ($ 972bn) in November..
Quotes of British debt securities remained practically unchanged at the beginning of trading on Monday.
Bank of England Governor Andrew Bailey believes that the preliminary assessment of the introduction of negative rates is not a sign that the regulator will actually reduce rates below zero. Woods actually confirmed this opinion in his letter..
Banks make money from interest, so negative rates will reduce their profitability, but Woods’ letter does not specifically mention this. Instead, the focus is on the technical readiness of lending institutions..
In the accompanying questionnaire, banks were asked how the IT systems of their retail and wholesale business would cope, as well as how much time and money it would take to deposit short-term «tactical» and permanent «strategic» changes.
Banks are already under pressure to help households and businesses fight the pandemic. Credit institutions may also face restricted access to EU markets when the transition period after the UK leaves the EU expires..