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Bank of England Moves Closer to Negative Interest Rates, Asks Banks if They Are Ready

The Bank of England has moved closer to adopting a negative interest rate policy. The central bank has asked commercial banks in the U.K. to provide details of how ready they are to deal with negative interest rates, asserting that for the policy to be effective, commercial banks need to be ready to implement it.

Bank of England Engages Commercial Banks on Negative Interest Rates

The Bank of England has asked commercial banks how ready they are to implement negative interest rates. This followed the central bank’s Monetary Policy Committee (MPC) revealing that it would assess the appropriateness of a negative official bank rate, including how a negative interest rate policy could be effectively implemented.

The central bank sent a letter, dated Monday, to the CEOs of commercial banks requesting information about their “Operational readiness for a zero or negative bank rate.” The letter is accompanied by a survey, which the central bank says will help it identify any “technical operational challenges associated with the implementation of a zero or negative bank rate, and to consider how best to prepare and prevent any unintended operational disruption.” Bank of England Deputy Governor Sam Woods explained in the letter:

“For a negative bank rate to be effective as a policy tool, the financial sector – as the key transmission mechanism of monetary policy – would need to be operationally ready to implement it in a way that does not adversely affect the safety and soundness of firms”

The letter explains that the Bank of England and the Prudential Regulation Authority “are commencing structured engagement on the operational considerations of a negative policy rate,” which include “being operationally ready to deal with a zero bank rate.” The central bank emphasized that it realized that a negative interest rate policy “could have wider implications” for commercial banks’ business and their customers.

The benchmark interest rate in the U.K. is currently 0.1%. A negative interest rate means commercial banks would have to pay the Bank of England to hold deposits for them. Several central banks have already adopted a negative interest rate policy, including the European Central Bank (ECB) and the Bank of Japan.

Commercial banks may decide to pass on the burden of negative interest rates to their customers, charging them for keeping money in the bank, like many banks in Germany are already doing. However, banks that do so risk losing customers to other banks that do not charge negative interest rates.