Bank of England asks banks how ready they are for negative interest rates

Watch: BOE asks UK banks if ready for negative rates

The Bank of England (BOE) has written to banks on Monday to see how ready they are for zero or negative interest rates.

In a letter from the BOE, deputy BOE governor Sam Woods said the central bank is “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 coronavirus pandemic has sent shockwaves across every economy in the world. The health crisis has meant that all countries have had to place its citizens in lockdowns and find ways to open up the economy again without further giving rise to COVID-19 cases and deaths.

In June, the International Monetary Fund (IMF) warned that the world economy was set to take a hit of more than $12tn (£9.6tn) by the end of 2021 with the UK economy set to plunge 10.2% in 2020.

READ MORE: Bank of England denies negative interest rate hint

Unheard of a decade ago, negative rates were widely pursued across Europe in the wake of the 2008 financial crash. The deposit rate at the European Central Bank remains negative.

The BOE has gone back and forth on whether negative interest rates could be a reality for the UK.

On 18 September, speculation mounted that the BOE could take interest rates into negative territory for the first time in history next year if the UK economy weakens further.

At the start of the month, BOE governor Andrew Bailey said that negative interest rates were “in the box of tools” but said the BOE had “no plans to use it imminently.”

Watch: What are negative interest rates

The BOE said in its letter on Monday that banks had to understand the implications of a move to negative interest rates "since the MPC [Monetary Policy Committee] may see fit to choose various options based on the situation at the time.”

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

"We are also seeking to understand whether there may be potential for short-term solutions or workarounds, as well as permanent systems changes," he said in the letter.

The BOE has set a deadline of 12 November for the banks to respond — one week after the central bank’s next monetary policy announcement.

“The Bank of England is laying the groundwork for a descent into negative interest rates. This should worry us all,” said Neil Wilson, chief market analyst at Markets.com.

“The idea that negative rates boost lending doesn’t wash – banks are not worried about the marginal impact on net interest margins as they are about whether the principal is repaid or not. And this in the current economic downturn and threat of rising unemployment, this will weigh on banks’ willingness to lend.”