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Banks ‘on stand-by’ for negative interest rates

Bank of England

The Bank of England chose not to change rates (pic: Terry Murden)

Banks have been put on six month stand-by for negative rates to be introduced by the Bank of England.

The Bank’s nine-member monetary policy committee chose unanimously not to change the historically low 0.1% rate today, though officials were split over asking lenders to prepare for negative rates on loans and mortgages.

If interest rates are negative, the Bank of England charges for any deposits it holds on behalf of the high street banks. That encourages banks to lend the money to businesses rather than deposit it.

Commercial banks need at least six months to prepare for negative rates and the central bank has now put them on notice, potentially paving the way for negative interest rates from August. The Bank of England qualified its alert by saying this is not a signal of future policy.

Laith Khalaf, financial analyst at AJ Bell, said: “Irrespective of what the Bank of England says, it’s likely markets will take this as a negative sign for longer term UK interest rate policy, even if it is designed simply to cover all bases as the pandemic continues to elevate economic uncertainty.”

He added that it is unlikely savers would see negative rates passed on, though the he said the outlook for cash savers is a continuation of rates at rock bottom levels.

“With inflation expected to rise this year, that’s really going to bite into the buying power of cash held in the bank.”

Luke Bartholomew, senior economist at Aberdeen Standard Investments, said: “No surprises today from the Bank of England, at least in terms of its interest rate decision.

“What is perhaps more interesting is that the decision was unanimous, with no participants voting for a cut to negative interest rates despite several expressing their attraction to the policy.

“This is unlikely to be the end of that debate, with the Bank releasing feedback from various stakeholders today along with their previous analysis.

“However, the chance of a cut to negative rates at least in the near term has probably decreased somewhat, as the Bank watches to see how vaccine roll out progresses and how the economy eventually recovers from the Covid shock.”

Howard Archer, chief economic adviser to the EY Item Club, said: “The Bank made it clear that while it would be possible to introduce negative interest rates in the UK, this did not necessarily mean they would be enacted.

“The Bank said it did not want send a signal that it intended to set a negative Bank Rate at some point but that it “would be appropriate to start the preparations to provide the capability to do so if necessary in the future.”

The Bank expects GDP to fall by about 4% in the first quarter in contrast to expectations of a rise in the November report.

However, the Bank expects the economy to grow strongly as the vaccination programme takes effect.

The Bank’s quantitative easing bond-buying programme was left unchanged at £895bn after pumping an additional £150bn into the economy at the outset of the second lockdown in November.

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