BOE tells banks to get ready for negative rates possibility

Bloomberg

The Bank of England (BOE) told banks to start getting ready for negative interest rates, while saying that message shouldn’t be taken as a signal that the policy is imminent.
The central bank’s Prudential Regulation Authority said most financial institutions aren’t sufficiently prepared, especially as regards to retail products like rate-tracking mortgages, so they should take at least six months to set their systems up without running undue risks. The BOE made the announcement as it held its key rate at a record low of 0.1%.
The move raises the threat that the central bank will push borrowing costs below zero, turning the lending business on its head by charging depositors to store cash while giving money back to borrowers. The BOE has been studying the case for negative rates for almost a year as a way to pull the UK out of its worst slump in three centuries. So far, it hasn’t followed counterparts in Europe and Japan in implementing the policy.
“I don’t think the bank would be making a statement like this if it wasn’t seriously considering using it,” said Nigel Terrington, who runs Paragon Banking Group Plc, a lender to residential landlords.
Many banks said their retail banking systems were “not built to accommodate a negative bank rate, and substantive changes would need to be made,” Sam Woods, who heads the PRA, said in a letter to financial executives.
The central bank emphasised that such a radical change in policy may not occur, and that its banking-regulation arm wasn’t giving a signal about future intentions of its monetary-policy side. That outlook lifted the pound, while money markets trimmed bets on a cut: they’re now pricing 4 basis points of easing by December, compared to 8 basis points ahead of the decision.
“The Monetary Policy Committee stressed again that these requests, and any subsequent related supervisory actions determined by the Prudential Regulation Authority, should not be interpreted as a signal that the setting of a negative Bank Rate or a tiered system of reserve remuneration were imminent, or indeed in prospect at any time,” the BOE said.
The issue was a real concern for members of the MPC: it was divided on whether to ask banks to start the work, with some members believing the economy wasn’t troubled enough to contemplate the policy and worried that the request to banks could be misconstrued, according to the minutes of the latest meeting.
“My message to markets is you really should not try to read the future behavior of the MPC from the actions we’re taking on our toolbox,” Governor Andrew Bailey said in a webcast after the report.