Bank of England says banks need 6 months for any sub-zero rates

Britain's banks would need at least six months to prepare for any cut in interest rates below zero, the Bank of England said on Thursday as it kept its stimulus programmes on hold ahead of what it hopes will be an economic recovery later this year.
 

The pound jumped by more than a cent against the US dollar and 10-year British government bond yields rose to their highest since March as investors heavily scaled back bets the BoE would implement sub-zero rates this year.
 

The British central bank said it would ask banks to get ready for the possibility of negative rates, but that financial markets should not view sub-zero borrowing costs as a foregone conclusion.
 

"Nobody should take any signal from this," Governor Andrew Bailey told a news conference.
 

"My message to the markets is you really should not try to read the future behaviour of the MPC from these decisions and these actions we're taking on the toolbox." Deputy Governor Sam Woods said most financial firms would need to make changes to their systems to implement a negative rate but cutting Bank Rate to zero would pose less of an operational challenge.

Britain's economy would probably shrink by 4% in the first three months of 2021, the central bank said, but it was expected to recover rapidly towards pre-COVID levels over the year.
 

Most businesses are once again hobbled by Britain's third national lockdown since the pandemic struck last year. The coronavirus crisis has hit the economy harder than any of the other Group of Seven rich nations, according to official data.
 

"With pent-up savings set to be unleashed later this year by consumers looking to make up for lost time, the likelihood of negative rates being implemented in the UK this year is reducing," said Hugh Gimber, global market strategist at J.P.

Morgan Asset Management.
 

Many firms are also grappling with post-Brexit barriers to trade with the European Union after Britain left the bloc's single market on Dec. 31.
 

Bailey said risks to the medium-term economic outlook and inflation had become more "two-sided".
 

RECOVERY PROSPECTS
 

The BoE maintained its Bank Rate at 0.1% and left the size of its total asset purchase programme at 895 billion pounds ($1.22 trillion), as expected.
 

It lowered its forecast for British economic growth for this year as a whole to 5% from its November forecast of 7.25% but it raised its forecast for growth in 2022 to 7.25% from 6.25%.
 

It stuck to its previous forecast that the economy would return to its size at the end of 2019, before the pandemic struck, by the first quarter of 2022.
 

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 Britain'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.