The Bank of England has contacted high-street and investment banks to inquire about their readiness for the adoption of a negative base rate. This move has led to speculation that the Monetary Policy Committee may be considering this dramatic step.
The UK’s central bank has asked commercial banks how they would be affected if borrowing costs were to drop to negative numbers.
Is It an Effective Policy Tool?
Sam Woods, a deputy governor of the Bank of England, stated:
“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 negatively impact the safety and soundness of firms.”
The letter sent to the banks requested specific information about their current readiness to deal with a zero bank rate, a negative bank rate, or a tiered system of reserves remuneration, and the steps they would need to take to prepare for the implementation of these measures.
Record Low Rates
The base rate of interest was cut to a record low of 0.1% in March due to the first wave of COVID-19. However, a move into negative interest rates would follow the example set by some other central banks, including those in Japan and the Eurozone.
Some analysts have expressed concerns that pushing the base rate below zero could negatively impact both savers and high street banks.