The Bank of England has asked banks and building societies to put in place tactical solutions by early August 2021, to be able to implement a negative Bank Rate.
This does not mean the Bank of England will take Bank Rate negative. But the tactical solutions are necessary so that a negative Bank Rate can be in the Monetary Policy Committee's toolkit.
WHAT DO WE MEAN BY A NEGATIVE BANK RATE?
Bank Rate is the interest rate paid on central bank reserves, which are deposits held at the Bank of England by banks and building societies. At the moment, with a slightly positive Bank Rate of 0.1%, these institutions receive one pound per year in interest for each thousand pounds they deposit. Under a negative Bank Rate, they would instead pay an interest charge on their reserves. At a negative rate of 0.1%, a £1000 deposit would be reduced to £999 after one year.
WHAT IS THE AIM OF A NEGATIVE RATE?
Through banks and building societies, a negative rate would aim to lower rates facing households and businesses – most importantly loan rates – which would in turn aim to increase consumption, investment spending, income and inflation.
WHAT CAN WE LEARN FROM NEGATIVE RATES IN OTHER COUNTRIES?
Loan rates for households and corporates in different countries have generally fallen following the introduction of negative interest rates.
Corporate deposit rates in Denmark and some other Euro areas have fallen below zero, with negative rates more likely to be imposed on larger corporates.
The expectation is that a bank and building society's decision to go negative will depend on the size and expected persistence of negative policy rates.
THINKING ABOUT CHARGING FOR HOLDING DEPOSITS?
There are legal considerations to be worked through when considering whether to introduce a charge for holding deposits. Here are some of the questions on our minds.
- How much notice do you need to give customers by law, regulation and under your T&Cs before introducing a charge for holding deposits? The maximum amount of notice required by law will be 2 months. However, this could be less depending on the type of account and for B2B contracts, whether you have applied the corporate opt out from the requirements of the Payment Services Regulations 2017.
- Are you able to introduce a charge or vary a rate down under your current variation provision? Is that current variation term in your B2C contracts compliant with unfair contract terms legislation? Are you comfortable that you are not exercising that term capriciously, arbitrarily or for an improper purpose? For example, have you run the figures to guage how a negative Bank Rate might impact your own cost of funding? Would the introduction of a charge be helping to push forward the Bank of England's monetary policy objective?
- Are you thinking about updating customer terms now so that you can immediately switch on a charge should Bank Rate go negative? In order to adopt this approach, you would need to be able to clearly articulate how the charge would be calculated and when it would be applied. For example, would the charge automatically switch off when Bank Rate goes positive again? Would it only apply to deposits above a certain threshold?
- If you give notice of a change to terms now, would you need to send a reminder notification before applying the charge in the future should Bank Rate turn negative?
… AND WHAT ABOUT NEGATIVE RATES ON LOANS AND MORTGAGES
Many loan products in the UK track Bank of England base rate. The impact on these products in the event of a negative bank rate is whether any margin will be eroded to reflect the negative rate and in the event that Bank of England base rate falls low enough, whether there can be a scenario where the economics of the loan change so that there is capital erosion or some other form of benefit passed to the borrower to reflect the negative rate. Firms are likely to have thought previously about the impact of negative rates on their tracker products. The FSA commented on impact of negative rates on tracker products back in 2009 commenting that if the specified interest rate drops beneath zero, the borrower's obligation to pay drops to zero, but not below. This is of course in addition to considerations as to whether loan and mortgage servicing platforms can accommodate a negative bank rate.
Lots to think about…