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Summary
- The Bank of England policymakers have said that while there are no immediate plans to introduce negative rates, but all the banks should be prepared for the same.
- Once the banks take the necessary steps to prepare their systems, the central bank can use this tool to promote lending.
The Bank of England has told the banks to be ready for negative interest rates in the next six months. The Monetary Policy Committee (MPC) has asked the Prudential Regulatory Authority, the national regulatory body for the British banks, to instruct banks to prepare themselves accordingly. The minutes of the MPC meeting released on Thursday, 4 February, said that while the committee did not wish to signal that it intended to bring the bank rate below zero sometime in the future, but it would only be proper to begin preparations for any emergency in the times to come.
The Prudential Regulatory Authority has accordingly been asked to engage with its regulated firms to start preparations for such a regime. Sam Woods, chief executive of the PRA, has sent out an instruction letter on Thursday itself to bank chief executives asking them to make the required changes.
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The Bank of England had reduced the bank rate to an all-time low level of 0.1 per cent in March 2020 after the pandemic struck the nation. Last May, BoE governor Andrew Bailey had said that the central bank was exploring the possibility of a negative rate.
Below-zero bank rates had been adopted by the Eurozone during the 2008 financial crisis to encourage investments. Japan’s central bank has also adopted this policy for several years.
The pros and cons
The proponents of the negative rate theory suggest that it can propel the economic growth by pushing up borrowings and private sector investments. It could also bring inflation rate closer to the goals of the BoE.
On the other hand, the critics are arguing that such a policy will damage the banking system as it challenges its core business model. At the ground level, a negative bank rate implies charging banks for storing money at the central bank. As a result, banks might raise certain fees to protect their profitability which could hurt the savers.
In fact, many banks have issued warnings that they are not prepared for a below-zero rate regime. For instance, an executive at the Santander Bank said in December that it would take up to 18 months for preparing the bank’s systems for such a scenario.
The MPC minutes mentioned that the PRA’s engagement with its regulated firms brought out the fact that implementing a negative bank rate over a shorter timeframe than six months might attract higher operational risks.
While Bailey has consistently maintained that he wanted to have such a rate available as a tool should a need arise, but Dean Turner, economist with UBS, feels that negative rates will remain on hold for this year as well.
