UK banks prepared for negative rates in case recovery crumbles

Bloomberg

Britain’s biggest financial institutions are on track to meet the Bank of England’s deadline to be ready for negative interest rates, giving authorities another tool to aid the economy if the
recovery fades.
Banks including Natwest Group Plc, HSBC Holdings Plc, Barclays Plc and Lloyds Banking Group Plc are close to completing the technical steps necessary to implement negative interest rates. The UK central bank in February asked for the work to be done by next month and is likely to deliver a progress report on August 5.
“To meet the Prudential Regulation Authority’s six-month expectation our members are deploying tactical solutions to ready their Treasury systems should there be a negative base rate,” said a spokesperson for UK Finance, banking industry’s main lobby group.
But with growth recovering sharply since BOE Governor Andrew Bailey called for preparations to begin, few expect this new functionality to be used anytime soon. Debate has shifted towards when the central bank should pare back stimulus for the economy to halt rising inflation.
“While technically we’ve been preparing, and we could do it, the likelihood of negative rates in the UK has in my view diminished,” Natwest Group Plc Chairman Howard Davies said in a Bloomberg Television interview.
BOE staff briefed members of the Monetary Policy Committee in June that preparations were underway, though many institutions said they needed time to make changes to IT systems and other processes to implement the policy. The BOE declined to comment further.
Sub-zero rates, already tried in the European Union and Japan, turn banking on its head by charging for deposits while paying those who borrow money. They’re aimed at keeping the cost of money low enough in financial markets to encourage borrowing and spending.
“Negative rates scenarios have mostly been shelved,” said Fabrice Montagne, an economist at Barclays Plc. “It would take a significant drag from the delta wave together with an unexpected worsening of the labour market for them to be
reconsidered in the near term.”
Still, a substantial weakening of the recovery or of confidence might be enough to put negative rates back on the agenda, and there are a few risks that may crystalise in the months ahead.
Coronavirus infection rates are surging, and Britain’s exit from the European Union is weighing down trade. A survey of purchasing managers indicated the economy this month grew at its slowest pace since March and the outlook was the worst since October.
While Bailey asked banks to prepare for the possibility of negative rates, he’s consistently signaled that they aren’t necessarily the BOE’s favoured policy tool. Instead, he’s focused attention on the Asset Purchase Facility through which the bank is buying 150 billion pounds ($206 billion) of bonds this year to help keep a lid on borrowing costs in financial markets.
The swiftness of the recovery in the UK pushed inflation above the BOE’s target unexpectedly in each of the past two months, prompting two policy makers
to call for a debate in August
on curtailing that stimulus
program early.
Despite that shift, banks have moved ahead with work on negative rates to give the BOE another policy option in the future.