Bank of England asks lenders if they are ready for negative interest rates

Banks should provide details on how they would cope if interest rates were cut to zero or even turned negative, the Bank of England has said.

Deputy governor Sam Woods has written to financial institutions across the UK saying they must be operationally ready for such a move, which has not been ruled out.

Negative interest rates were considered by the central bank during a meeting in September, although Mr Woods was keen to stress no decision had been made.

The idea of negative interest rates, which have been used in other countries for several years, is to encourage banks to increase lending because the Bank of England will charge them to hold their cash.

Families and household savers are unlikely to have to pay to have their money in a savings account, but any interest rate offered would be expected to fall.

Variable-rate mortgages could fall but many have clauses saying interest payments will never fall below zero.

In the letter to firms, the banker wrote: “We recognise that a negative policy rate could have wider implications for your firm’s business and your customers.

“The Bank and PRA (Prudential Regulation Authority) 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.”

He added: “As part of this work, we are requesting 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.”

The questionnaire asks firms of their readiness for rates of zero, a tiered approach used in other countries and interest rates with large decimal places – citing an example of a Base Rate of 0.00001%.

Mr Woods was also keen to stress in the letter that the fact he was asking for details is “not indicative that the MPC (Monetary Policy Committee) will employ a zero or negative policy rate… This engagement is not asking firms to begin taking steps to ensure they are operationally ready to implement a negative Bank Rate”.

Banks and financial institutions have been asked to respond with answers on costs, technology requirements and details of potential consequences by November 12.