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The Bank of England asks banks for information on availability at negative rates

Mounted police officers sit outside the Royal Exchange and Bank of England in London on 17 June 2020.

TOLGA AKMEN | AFP via Getty Images

The Bank of England asked banks on Monday how ready they were for zero or negative interest rates, following last month’s announcement that it was considering how to bring rates below zero if necessary.

Other central banks have pushed rates into negative territory in an effort to spur banks to lend more, and the BOE said in September that it was looking into what such a policy could mean in Britain.

“As part of this work, we ask for specific information about your company̵

7;s current readiness to deal with a zero bank rate, a negative bank rate, or a tiered system of reserve remuneration – and the steps you should take to prepare for it. ‘implementation of these, ”BoE Deputy Governor Sam Woods said in a letter to the banks.

The BoE and lenders needed to understand the implications of such moves “as the MPC may see fit to choose various options based on the situation at the time,” he said, referring to the central bank’s Monetary Policy Committee.

Woods said he wanted to know if there were any technological challenges in implementing zero or negative rates.

“We are also looking into whether there may be the potential for short-term or alternative solutions, as well as permanent changes to the systems,” he said.

The BoE set a November 12 deadline – a week after its next monetary policy announcement – for banks to respond.

Last week, money markets rejected bets that the BoE would cut rates below zero. Investors see rates drop below zero in May 2021, rather than March.

The BOE cut its benchmark rate to an all-time low of 0.1% in March to help the economy through the coronavirus crisis.

Its next move is expected to be an increase in its £ 745 billion ($ 972.00 billion) bond purchase program in November.

Sterling and UK government bonds changed little in early trading on Monday.

Governor Andrew Bailey said the BOE’s assessment of negative rates was not a sign that it would cut rates below zero, and Woods echoed those comments in his letter.

Banks earn from interest and negative rates would affect profitability, but Wood’s letter made no specific mention of it, focusing instead on the technical preparation of lenders.

An accompanying questionnaire asked banks how they could cope with the IT systems of their retail and wholesale businesses and how much time and money it would cost to make short-term “tactical” and permanent “strategic” changes.

Banks are already under pressure to help families and businesses grapple with the pandemic. They could also experience reduced market access in the European Union when Britain’s post-Brexit transition period expires.

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