Get ready for negative interest rates, Bank of England tells lenders

The Bank of England has written to lenders and insurers across the country to ask them to prepare in case it decides to reduce the base interest rate to below zero.

The Bank’s deputy governor of prudential regulation, Sam Woods, told banks they should get ready for a potential decision on negative rates.

But he stressed not to read the request as an indication that negative rates will or will not be implemented.

On Thursday the Bank’s Monetary Policy Committee (MPC) decided not to cut rates below current record-low levels at 0.1% at this point. However it instructed Mr Woods to tell banks to be ready in case it changes its mind at future meetings.

“The (Prudential Regulation Authority) will now engage with PRA-authorised firms on their development of tactical solutions, with the aim of having firms put themselves in a position to be able to implement a negative Bank rate at any point after six months,” he wrote.

“Our engagement to date and this subsequent letter should not be interpreted as a signal that the setting of a negative Bank rate is imminent, or indeed in prospect at any time.”

The rate sets the level of interest that normal banks are paid on the deposits they have with the Bank of England. Any lowering further incentivises banks to lend their money, rather than stash it away.

For bank customers it also tends to make borrowing cheaper, while reducing the return on savings. This in turn helps encourage people to spend or invest more.

However, a negative rate is often seen as a mental block, which could end with banks charging their customers to use a current account.

The warning now is intended to give banks enough time to make the changes to their systems they need to deal with potential negative rates in future.

The high street lenders in particular warned Mr Woods and his team that they would need many months to tweak their system to deal with negative numbers.

Short-term solutions that would allow banks to deal with a negative rate would take up to six months to implement, they said.

“These tactical solutions referred to workarounds that would be put in place to handle a negative Bank rate, but do not necessarily result in a negative rate on retail products such as mortgages and current or savings accounts,” the Bank said.

It could take between 12 to 18 months for the banks to implement more long-term solutions which would see the negative rates passed on to customers.

Tracker mortgages, where the interest that a borrower pays is directly linked to the base rate, would take especially long to prepare.