The Bank of England has contacted UK banks to ask them how ready they would be if the base rate was cut to zero or turned negative.
Although the Bank has no current plans to make such a move, Deputy Governor Sam Woods said that officials need to know whether there were any technological or operational challenges involved.
The Bank of England cut interest rates to the current historic low of 0.1% at the start of the Covid-19 crisis. Some central banks, including the European Central Bank, have already implemented negative interest rates as a monetary policy tool.
“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,” Woods wrote.
The letter asks bank CEOs to provide “specific information about your firm’s current readiness to deal with a zero Bank Rate, a negative Bank Rate, or a tiered system of reserves remuneration — and the steps that you would need to take to prepare for the implementation of these”.
“We are also seeking to understand whether there may be potential for short-term solutions or workarounds, as well as permanent systems changes,” Woods added.
In a recent Citizen’s Panel open forum held by the Bank of England, Governor Andrew Bailey said the pandemic meant that negative rates should be considered as part of its “tool kit”, the Guardian reports.