Negative interest rates could spell the end of free bank accounts, experts warned after the Bank of England gave its clearest indication yet that the controversial policy could be introduced.
The Bank has written to UK lenders' chief executives asking them to set out their readiness for negative rates, raising the prospect of an unprecedented move below zero as the recovery begins to slow.
It could trigger massive losses for lenders. According to analysts and grandees, in an extreme scenario banks could be forced to start charging millions of customers a monthly fee.
Sir Philip Hampton, who was chairman of taxpayer-backed Royal Bank of Scotland at the height of the financial crisis, said: "In the case where negative rates are significant and prolonged, and are charged on current accounts of ordinary earners, I think there’s likely to be a strong customer reaction and pressure to make the revenues fit the costs with more transparency. That probably means fees.
"The alternative could be negative interest rates on bigger deposits. That mainly hits the better off who can usually afford it but also pensioners and other savers. But these events often lead to something fairly radical."
Threadneedle Street has already slashed rates to an all-time low of 0.1pc, wrecking banks' profits and landing savers with a return of close to zero on their deposits.
Bank of England Governor Andrew Bailey sought to play down the controversial policy yesterday, saying that Threadneedle Street was "not near and haven't addressed whether we should use them". Fellow rate-setter Jonathan Haskel said the Bank had an "absolutely open mind" on the policy.
If rates go negative, banks will be charged for hoarding cash rather than lending it out. Businesses and ultra-wealthy customers with large balances are thought to be the most likely to face fees for deposits as a result.
Insiders at the country's high street banks sought to play down the risks of general consumers also being hit, but experts said they could nonetheless be forced to act.
Mike Hampson, who runs consultant Bishopsgate Financial, said: “It’s only a matter of time before free banking as we know it comes to an end.
"Banks have been looking at ways to charge for running accounts, and the challengers have, in particular, struggled to make money in the current environment."
Britain has long been unusual for not charging a current account fee, unlike most other Western nations. Instead, banks recoup their costs through add-ons such as overdraft and foreign transaction charges, as well as by lending out depositors' money at interest.
Former Bank of England policymaker Andrew Sentance, of Cambridge Econometrics, said the concept of free banking is hazy. Regulators said in 2018, for example, that there is no such thing as free banking because lenders load customers up with hidden bills.
However he added: "The way banks approach their customers won't be helped by negative interest rates. They will be under pressure to increase their margins in other ways."
But John Cronin, a banks analyst at Goodbody, said he believes negative rates on large deposits are more likely than a fee for all bank accounts.
The Bank of England's letter to banks on Monday is the clearest indication yet that Threadneedle Street is seriously considering turning rates negative for the first time in its history.
Deputy governor Sam Woods said: "We are requesting specific information about your firm's current readiness to deal with a zero bank rate, a negative bank rate or a tiered system of reserves remuneration – and the steps that you would need to take to prepare for the implementation of these."
Policymakers have given mixed messages in recent weeks about the possibility of a move to negative rates.
Monetary Policy Committee member Silvana Tenreyro rejected criticisms over the policy last month, insisting the evidence from other countries was "encouraging" and that banks would cope with further pressure on their finances.
However, Mr Bailey said less than three weeks ago that the Bank was not about to push interest rates below zero in the near future.
But with the Government announcing tighter restrictions in England on Monday, fears are mounting that the fragile economic recovery will go into reverse and more stimulus will be needed to boost activity.
Last week, Mr Bailey warned that the UK's recovery was at risk of stalling and vowed to ramp up stimulus if needed.
In the letter to financial institutions, Mr Woods said: "This engagement is not asking firms to begin taking steps to ensure they are operationally ready to implement a negative bank rate.
"We recognise that a negative policy rate could have wider implications for your firm’s business and your customers. The Bank... will consider the wider business implications, including on financial stability, safety and soundness of authorised firms and pass-through to the wider economy.
"This letter, however, is seeking information to understand firms’ operational readiness and challenges with potential implementation, particularly in terms of technology capabilities."
The lenders have been asked to respond to the request by Nov 12.