Earlier in the year I looked at the unprecedented moves by the Bank of England in announcing emergency cuts to interest rates on 11 March and 19 March 2020. I didn't know then how soon I'd be over the word "unprecedented". It really did feel an extraordinary move then. October 2020, enter another extraordinary move in the form of this Dear CEO letter.

I've had plenty of conversations with clients over the years about whether their systems and their terms and conditions allow for a zero Bank Rate, and in my experience most can or should. By Bank Rate I mean the Bank of England base rate. The trickier issue seems to be a negative Bank Rate. Projects on negative rates gained traction after the European Central Bank moved to a negative rate in June 2014. A lot of them didn't get very far as other priorities took over in a world of constant legal and regulatory change. Being prepared for zero or negative rates was viewed as important but not an imminent reality.

Since the changes to the Bank Rate in March there has been a renewed focus across the industry on a zero or negative Bank Rate. In May 2020, Andrew Bailey, Governor of the Bank of England, told the Treasury Select Committee that negative rates were under active review. In August and September 2020, the Bank of England’s Monetary Policy Committee (MPC) made statements recognising that they would continue to assess the appropriateness of a negative official Bank Rate and look at operational considerations. The PRA and the Bank of England recognise that for "a negative Bank Rate to be effective as a policy tool, the financial sector – as the key transmission mechanism of monetary policy – would need to be operationally ready to implement it in a way that does not adversely affect the safety and soundness of firms."

In the Dear CEO letter it is stressed that this "structured engagement is not indicative that the MPC will employ a zero or negative policy rate. The appropriate level of Bank Rate remains a decision for the MPC, which sets monetary policy to meet the 2% inflation target in a way that helps to sustain growth and employment."

The PRA and Bank of England make clear that they are not asking firms to take steps to become operationally ready to implement a negative Bank Rate.  They accept the policy implications of such a decision would be much wider. They seem to be trying to get a handle on the technological constraints in implementing such change. They are seeking to understand the operational issues so they can consider how best to prepare for and prevent unintended operational disruption.

The responses to the Dear Ceo letter will shared across the Bank of England and the PRA. This type of information will be crucial when the MPC come to making future decisions. Completing the template attached to the Dear CEO letter is voluntary, but CEOs are encouraged to respond so that the Bank of England, PRA and MPC have an accurate understanding of the potential risks and issues.

Responses are to be submitted by 12 November 2020. PRA supervisors may follow up with CEOs afterwards.