MNI INSIGHT: December Next Step On BOE’s Negative Rate Path

The Bank of England could provide results of its consultation into the effects of negative rates on the banking system in its Financial Stability Report due Dec. 10, setting the stage for further Monetary Policy Committee discussion of the matter the following week, MNI understands.

The letter Monday from the Bank and the Prudential Regulation Authority (PRA), the BOE'S financial supervision arm, asking banks and others about their readiness for rates below zero had a Nov. 12 deadline, which is after the Monetary Policy Committee meeting that month.

The MPC went through the economics of negative rates in the August Monetary Policy Report and while subsequent comments by individual members on the topic have made headlines they have not raised fresh issues. The earliest they could next address the issue would be at their meeting ending Dec. 17 meeting, with the results of the consultation incorporated into the Financial Stability Report due Dec. 10, although this has still to be finally decided, MNI understands.

The BOE's Financial Policy Committee includes PRA head Sam Woods.

GRADUAL APPROACH

Any move to suddenly adopting negative rates would run the risk of being counter-productive if banks, consumers and business were not fully prepared and if their introduction generated alarm. So the Bank's approach to considering possible use of the tool has been one of gradualism, with each step clearly signposted.

Governor Andrew Bailey made the point in recent remarks that negative rates may work better in supporting a recovery rather than in the depths of a crisis and that their effect in the UK may be dampened because the banking sector is relatively reliant on deposits for funding and experience shows bank deposit rates do not turn negative.