UK banks need at least six months to prepare for any cut in interest rates below zero, the Bank of England has said as it kept its stimulus programs on hold ahead of what it hopes will be an economic recovery later this year.
The central bank published on Thursday the results of its review of how prepared lenders such as HSBC, Lloyds and Barclays are for any move to implement negative interest rates in the UK for the first time.
“The Prudential Regulation Authority’s engagement with regulated firms had indicated that implementation of a negative Bank Rate over a shorter timeframe than six months would attract increased operational risks,” the BoE said in a statement.
The pound jumped by more than half a US cent against the US dollar and British government bond yields jumped by around 3 basis points as investors scaled back their bets that the BoE will implement negative rates anytime soon.
The BoE said it did not want to send a signal that it intended to set a negative Bank Rate but it “would be appropriate to start the preparations to provide the capability to do so if necessary in the future”.
BoE regulators should start getting banks ready to implement negative rates at any point from six months time, it said.
The BoE also said it was working on developing a new message for investors and businesses about when it might start to remove the huge stimulus in place for the UK’s economy.
“The Committee agreed to ask Bank staff to commence work to reconsider the previous guidance on the appropriate strategy for tightening monetary policy should that be required in the future,” it said.
The BoE maintained its Bank Rate at 0.1 per cent and left the size of its total asset purchase programme at 895 billion pounds ($A1.6 trillion), as expected.
The BoE said the UK’s economy would probably shrink by 4 per cent in the first three months of 2021 but it was expected to recover rapidly towards pre-COVID levels over 2021.
The central bank lowered its forecast for British economic growth for this year as a whole to 5 per cent from its November forecast of 7.25 per cent but it raised its forecast for growth in 2022 to 7.25 per cent from 6.25 per cent.
It stuck to its previous forecast that country’s economy would return to its size at the end of 2019, before the pandemic struck, by the first quarter of 2022.