The Bank of England has told lenders they must be ready to introduce negative rates within six months if the UK economy takes a further turn for the worse, in a potential blow to millions of hard-pressed families.
The controversial policy would heap more pain on savers who have endured rock bottom rates since the financial crisis, while financial experts have warned it could herald the end of free banking.
The Bank has already cut interest rates to just 0.1pc since Covid struck but launched a consultation on an unprecedented move below zero with more than 160 banks and building societies last autumn as it scrambles for more ammunition to fuel the recovery.
Negative rates are seen as a last-ditch effort to protect a flatlining economy. They mean banks are charged for hoarding cash on deposit instead of lending it out.
Although this does not automatically mean banks would in turn start charging ordinary customers for holding their cash, lenders such as HSBC have already warned that account fees could be an option in future.
Policymakers have ruled out a cut below zero in the next six months, saying that a faster move could pose “material” risks to the “safety and soundness” of banks, with concerns focused on banking IT systems that are not able to handle minus numbers.
The Bank’s Prudential Regulation Authority arm has instead ordered firms to “put themselves in a position to be able to implement a negative Bank rate at any point after six months”.
Andrew Bailey, the Bank’s Governor, highlighted recent IT fiascos in the banking sector – such as TSB’s botched upgrade in 2018 – as reasons for caution if banks were forced to carry out negative rates “without doing the rigorous testing, trialling and so on that we expect”.
He said: “We know, sadly, there’s some other well documented and much publicised examples of banks doing changes to their systems are getting themselves into quite difficult situations and having outages that are obviously very damaging to the customer and ultimately to the banks themselves, so we don’t want to cause that to happen.”