How ready are the banks for a negative interest rate?

UK Savers Set to Feel Sting as High Street Banks Move Towards Introducing Negative Interest Rates

Bank of England asks banks if ready for negative interest rates

Money markets last week pushed back bets that the BoE would cut rates below zero.

But with its main interest rate at 0.1 per cent, the Bank said it would begin a "structured engagement" with commercial banks about the implications of going even lower.

Cable still seen more steady on the day around 1.3040-50 now.

This was an unprecedented move, and the lowest rate setting in the central bank's history. The base rate is 0.1%. On a £100,000 mortgage, for example, the debt would fall by £500 in the first year even with no repayments. With interest rates on many accounts plummeting in recent months, many have wondered if the situation could go further.

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

"We recognise that a negative policy rate could have wider implications for your firm's business and your customers".

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'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.

The letter wanted to know specifically if there were any technology challenges to implementing negative rates.

This comes after its announcement in September that stated that they were considering how to take rates below zero if it came to it during the current economic crisis and pandemic.

These were the details of the news BoE asks banks how ready they are for sub-zero rates for this day.

The deputy BoE governor stressed that the appropriate level of rate remains a decision for the Bank of England's Monetary Policy Committee (MPC), which sets monetary policy to meet the 2 percent inflation target in a way that helps to sustain growth and employment. European Central Bank research has shown that negative rates boosted bank lending. The deadline for responses is Thursday 12 November 2020.

How do negative central bank rates work?

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This would effectively mean a charge for holding cash.

A bank that leaves money parked at the Bank of England would have to pay interest instead of being paid interest.

Visit Business Insider's homepage for more stories. Everyone is accustomed to paying interest to borrow money and earning interest when depositing money but negative rates would reverse that, benefiting borrowers and penalising savers.

Investors are split over whether or not the BOE will ever go through with introducing negative rates, citing, among other things, the risks to the U.K.'s financial sector and officials' own mixed views on the subject.

Interest rates in the United Kingdom and elsewhere have reached historically low levels since the financial crisis in 2008.

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