UK Edition
The Bank of England has told lenders they must be ready to introduce negative rates within six months if the UK economy takes a further turn for the worse, in a potential blow to millions of hard-pressed families.
The controversial policy would heap more pain on savers who have endured rock bottom rates since the financial crisis, while financial experts have warned it could herald the end of free banking.
The Bank has already cut interest rates to just 0.1pc since Covid struck but launched a consultation on an unprecedented move below zero with more than 160 banks and building societies last autumn as it scrambles for more ammunition to fuel the recovery.
Negative rates are seen as a last-ditch effort to protect a flatlining economy. They mean banks are charged for hoarding cash on deposit instead of lending it out.
Although this does not automatically mean banks would in turn start charging ordinary customers for holding their cash, lenders such as HSBC have already warned that account fees could be an option in future.
Policymakers have ruled out a cut below zero in the next six months, saying that a faster move could pose “material” risks to the “safety and soundness” of banks, with concerns focused on banking IT systems that are not able to handle minus numbers.
The Bank’s Prudential Regulation Authority arm has instead ordered firms to “put themselves in a position to be able to implement a negative Bank rate at any point after six months”.
Andrew Bailey, the Bank’s Governor, highlighted recent IT fiascos in the banking sector - such as TSB’s botched upgrade in 2018 - as reasons for caution if banks were forced to carry out negative rates “without doing the rigorous testing, trialling and so on that we expect”.
He said: “We know, sadly, there's some other well documented and much publicised examples of banks doing changes to their systems are getting themselves into quite difficult situations and having outages that are obviously very damaging to the customer and ultimately to the banks themselves, so we don't want to cause that to happen.”
'Door ajar' to going sub-zero
John Garvey, of PwC, said: “It is a bit of a ‘Y2K’ moment as there are an enormous number of models, systems and contracts that will need to be addressed.”
Five other central banks - in Japan, Switzerland, Denmark, Sweden and the European Central Bank - have used negative rates, although Sweden ended its experiment with the measure in 2019.
However, Mr Bailey stressed the PRA’s orders to banks should not be taken as a “signal” that Threadneedle Street’s monetary policy committee intended to follow suit.
He said: “The committee was clear that it did not wish to send any signal that it intended to set a negative Bank rate at some point in the future. But on balance, it concluded that it would be appropriate to start the preparations, in order to provide the capability to implement a negative bank rate if necessary.”
The Bank is hopeful an economic recovery will take hold within months as lockdown is eased and vaccinations bring Covid under control, meaning rates will not have to be cut.
Allan Monks, chief UK economist at JP Morgan, said the “door was ajar” to negative rates as a result of the Bank’s move.
He said: “Once the Bank does overcome operational concerns with negative rates – which it expects to do so in six months’ time – it will only be a matter of time before the policy is eventually adopted.”
Free banking under threat
Saving rates are already at a record low after the average interest on an easy-access savings account sank to just 0.17pc. Easy-access Isas return just 0.24pc, according to data firm Moneyfacts. Returns are now likely to be punished even further.
Some commentators argue that pushing rates below zero could lead to far more bank accounts paying zero interest or introducing fees.
Laith Khalaf, financial analyst at stockbroker AJ Bell, said: “Negative base rates would likely lead to an explosion in the number of bank accounts paying zero interest, which currently house around £225bn of savers’ cash. While savers might not explicitly pay interest to their bank, it’s possible banks would introduce fees instead."
The Bank’s economic predictions of a vaccine-fuelled recovery as restrictions are lifted in the months ahead were greeted positively by financial markets.
The pound pushed higher following the Bank’s decision, buoyed by dwindling expectations that Threadneedle Street will follow through on introducing sub-zero rates.
Relieved investors also bought bank shares, leaving retail-focused lenders Lloyds and NatWest as the FTSE 100’s top risers.
The blue-chip index finished 4 points lower at 6,503.