The PRA had previously engaged with lenders in October 2020 to discuss the possible implementation of a zero or negative Bank Rate, but firms had not been asked to begin taking any steps to ensure that they were operationally ready.
In its latest meeting, the MPC discussed when, and if so at what point, the PRA should ask firms to begin 'tactical preparations' in order to be ready for negative rates.
Some members were concerned that the request could be "misconstrued as a signal that the MPC setting a negative Bank Rate was in prospect, or even imminent".
Additionally, the PRA informed the MPC in its latest meeting that the majority of regulated firms would need to make some changes to their systems and processes in order to implement a negative Bank Rate. On the basis of these risks, the Prudential Regulation Committee (PRC) had concluded that any shorter implementation period could "adversely impact some firms’ safety and soundness".
On the other hand, others saw "little reason not to request the beginning of those preparations now", thereby adding the possibility of negative rates to the MPC’s toolkit at the earliest opportunity.
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 MPC therefore agreed to request that the PRA should engage with regulated firms to ensure they commence preparations in order to be ready to implement a negative Bank Rate at any point after six months. The PRA will make the request by way of a follow-up letter to CEOs of PRA-regulated firms.
In addition, and against the backdrop of the recent significant expansion in the scale of the Asset Purchase Facility, 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. That previous guidance stated that the stock of purchased assets would be expected to be maintained until Bank Rate reached a level from which it could be cut materially. And, in June 2018, the Committee had agreed that it intended not to reduce the stock of purchased assets until Bank Rate reached around 1.5%.
