Cutting the UK’s official interest rate below zero would fail to boost Britain’s Covid-stricken economy because lenders would increase mortgage costs in response, the Bank of England has been told.
The leading representative of Britain’s building societies said high street lenders were not in a position to handle negative interest rates, had computer systems that were ill-equipped and that the move would be counterproductive for the British economy.
Mike Regnier, the chief executive of Yorkshire building society and the chairman of the Building Societies Association, said negative rates would lead big high street lenders to push up their mortgage rates to protect profitability – hurting consumers and the wider economy.
“I fear this would have the opposite effect from supporting the economy, as rates would go up for borrowers as banks protect their margins,” he told the Guardian.
Threadneedle Street will on Thursday reveal the findings from its work to assess the UK’s readiness for negative interest rates, as it considers ways to boost the economy amid the intensifying fallout from Covid-19. Negative rates would involve charging commercial banks and building societies to deposit funds at the central bank – with the aim of encouraging additional lending and cheaper borrowing costs.
The Bank of England wrote to all banks and building societies in October to check whether they could pass on negative interest rates if the central bank cut the cost of borrowing below the current base rate of 0.1%. Andrew Bailey, the Bank’s governor, has argued that the policy is in the Bank’s “toolbox” for boosting the economy but has played down its use in the short-term.
However, Regnier said lenders were far from ready, and questioned whether such a move would achieve its stated aims. “I really don’t think negative rates are a good idea. Obviously, it’s not up to me, it’s up to the Bank. But there are a number of things that would make it very challenging.”
Banks and building societies make profits by charging a higher rate of interest to borrowers than they do to savers, and it is believed negative rates would lead to a narrowing of this “spread”. This would hit profits, which industry leaders have warned would undermine the viability of banks and threaten financial stability.
When Threadneedle Street cuts its interest rate, banks typically lower their deposit rates and lending rates in response. However, Regnier said banks would not want to charge consumers negative interest – meaning they would instead need to drive up lending rates to protect their margins.
“I can’t see a scenario where we’d charge our retail savers to leave their deposits with us,” he said. “Banks would need to protect their net interest margins. If they can’t pass the rate cut through to their savers, they have to put rates up for borrowers, and that defeats the object of a rates cut.”
With savings rates for consumers plunging to rock-bottom levels, Yorkshire building society is investing £20m to increase the rates it offers. More than 1.3 million members will benefit from the changes, which take effect from Friday and will push its average savings rate from 0.17% to about 0.23%.
As well as affecting savers and borrowers, Britain’s biggest banks would need to update their computer systems to handle a move into negative rates. This includes banks such as NatWest Group, which has an IT system that would not recognise a negative interest rate.
Sam Woods, the Bank of England’s deputy governor, said earlier this month it was looking at whether there was a “Y2K-type issue” across the industry that would make it harder to plunge rates below zero.
Regnier said the Yorkshire would need to take similar steps but that Threadneedle Street had not told it such an investment was necessary yet. “They’re not asking banks and building societies at the moment to make the investment. They’re in the process of working out what it would take.
“They said they’d give us notice, and at the moment they haven’t yet given that formal notice to make what is a fairly significant investment across the industry.”