The Bank of England has told British banks that they should take whatever steps are necessary to prepare their systems for negative interest rates, opening up a pathway for the central bank to use this additional policy tool to encourage more lending.
But policymakers cautioned on Thursday that they weren’t trying to send the signal that rates would be cut below zero imminently. The markets responded accordingly: The British pound and short-dated bond yield rose as traders pared back expectations for a rate cut.
The central bank held interest rates at 0.1 percent and continued its asset-buying program at the same pace.
For months, there has been a debate about whether the Bank of England could introduce negative interest rates as another mechanism to bolster the economy. Other central banks in Europe and Japan have had negative interest rates for several years, but there were questions about how effective this move would be in the British economy.
After consulting with banks about whether it would be feasible to cut rates further, it found that most firms would need to make some changes to their systems and processes. On Thursday, it asked the banks to begin making these changes.
“While the Committee was clear that it did not wish to send any signal that it intended to set a negative Bank Rate at some point in the future, on balance, it concluded overall that it would be appropriate to start the preparations to provide the capability to do so if necessary in the future,” the minutes from February’s monetary policy meeting said. Banks should prepare “to be ready to implement a negative Bank Rate at any point after six months.”
The central bank also updated its forecasts for the British economy, which is in the midst of the pandemic and also dealing with the initial impact of Brexit, its divorce from the European Union’s single market and customs union. It said the economy didn’t suffer as badly at the end of 2020 as previously expected, but there would be a downturn in the first quarter of 2021 because of the long lockdown while vaccinations are rolled out.
Gross domestic product was forecast to fall 4.2 percent in the first three months of the year. That’s a downgrade from November’s forecast, when the central bank had predicted more than 2 percent growth.