11:24 AM, 12th October 2020, About 8 months ago 10
There is no indication it is likely, or that the Bank of England will reduce the Base Rate to zero or a negative figure. However, a letter has been sent by Sam Woods on behalf of the Bank of England to selected firms’ CEOs asking about their operational readiness should interest rates move in that direction.
This is to prepare the groundwork should economic factors make a decision to decreases the interest rate advantageous. The Bank of England has seemed keen so far to avoid a negative rate as this brings its own complications and costs with little evidence of effectiveness when implemented by the Central European Bank and long term negative interest rates in Japan.
A negative interest rate would encourage a Bank, on the one hand, to lend rather than hold on to reserves, but equally would make it more difficult to attract funds adversely affecting liquidity reserve ratios that must be kept above a certain point under stress testing rules.
Operational readiness for a zero or negative Bank Rate
Since the financial crisis in 2008, interest rates in the UK and elsewhere have reached historically low levels, and some central banks have implemented negative interest rates as a monetary policy tool. In August, the Bank of England’monetary Policy Committee (MPC)noted that it would continue to assess the appropriateness of a negative official Bank Rate alongside all of its other tools.
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.
As highlighted in the September minutes of the MPC,1the Bank of England (the Bank) and the Prudential Regulation Authority(PRA)are commencing structured engagement on the operational considerations of a negative policy rate. For these purposes, we also include being operationally ready to deal with a zero Bank Rate. This structured engagement is not indicative that the MPC will employ a zero or negative policy rate. The appropriate level of Bank Rate remains a decision for the MPC, which sets monetary policy to meet the 2% inflation target in a way that helps to sustain growth and employment. This engagement is not asking firms to begin taking steps to ensure they are operationally ready to implement a negative Bank Rate.
We recognise that a negative policy rate could have wider implications for your firms business and your customers. The Bank and PRA will consider the wider business implications, including on financial stability, safety and soundness of authorised firms and pass-through to the wider economy. This letter, however, is seeking information to understand firms’ operational readiness and challenges with potential implementation, particularly in terms of technology capabilities.
Responding to this letter and the structured survey questions attached will help us and firms to identify whether there are 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 that could be associated with a change should the MPC decide it was appropriate.
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