Bank of England gave banks six months to prepare for negative rates
The Bank of England said on Thursday it would take UK banks at least six months to prepare for a move to negative interest rates.
In October, the Bank of England (BOA) questioned British banks about their readiness for negative interest rates, saying in September that it is looking into accepting rates below zero if necessary..
In a letter to creditors posted on Thursday, Sam Woods (Sam Woods), head of the Prudential Regulatory Authority (PRA), stated that it will take time for most banks to change systems and processes and implement strategic or tactical solutions.
«Based on the responses of financial institutions to this event, PRA understands that most of them will be able to implement tactical solutions to compensate for a negative bank rate within six months without significant risk to safety and reliability», – the letter says.
The PRA will now work with finance companies to develop tactical solutions to prepare all authorized financial institutions for a negative rate regime in six months. However, the Bank clarified that this does not mean that the introduction of negative rates is inevitable..
With negative interest rates, banks do not receive interest for keeping their money at the central bank, but, on the contrary, are forced to pay for it. Therefore, it is more profitable for them to lend to other banks, companies and individuals, while they have to set negative rates on deposits. In theory, this encourages borrowing more and spending more – taking action., which should help the economy grow.
«There is no need for negative interest rates because they are bad for depositors and bad for banks. We can look at their impact on the eurozone to see this.», – said Neil McKinnon (Neil MacKinnon), global macro strategist at VTB Capital, in a research note. McKinnon suggested that since the start of the pandemic the necessary work has already been done through budgetary incentives.
«Once the restrictions are gradually lifted in response to a successful vaccination program, financial support could pave the way for UK recovery in the right direction», – he added.
Monetary Policy Committee of the Bank of England, MPC), within its first meeting in 2021, left current monetary policy unchanged, setting the base lending rate at 0.1% and targeting asset purchases at £ 895 billion ($ 1.2 trillion).
MPC voted unanimously to keep rates flat and keep its QE program at current levels as the UK hopes and struggles to neutralize economic damage caused by the coronavirus pandemic.
Luke Bartholomew (Luke Bartholomew), senior economist at Aberdeen Standard Investments, said the unanimous vote came as a surprise to him, given that some MPC members have expressed interest in zero or negative interest rates. He suggested that this decision «is unlikely to end this debate».
«However, the likelihood of a cut in interest rates, at least in the near term, is likely to have diminished somewhat as the Bank monitors how vaccine introduction progresses and how the economy will eventually recover from the shock of the Covid virus.», – added Bartholomew.
UK economic outlook remains uncertain as nationwide crantin measures remain in place until at least early March as the country tries to contain the spread of the infection virus while vaccine rollout continues at a rapid pace.
The bank also lowered its forecast for economic growth for 2021 to 5%, forecasting annual growth of 7.25% in its November monetary policy report..
Since the release of the report, the pound sterling is unchanged against the dollar, while the euro is up 0.4% against the pound.