Barclays set for negative rates in UK but hope it doesn't happen

Barclays (BARC.L) is operationally prepared for the UK’s interest rate to fall below zero but hopes to avoid that outcome, the bank’s chief executive told journalists on Friday.

“We’re set for negative interest rates if that happens,” Jes Staley said on the bank’s third quarter earnings call. “But what we hope we have is a resolution to the pandemic, economic growth return and start getting interest rates back up again.”

The UK’s current interest rate stands at 0.1% and the Bank of England this summer began exploratory work looking at how negative interest rates might work in the UK. The central bank wrote to commercial bank CEOs earlier this month asking them whether they were prepared for zero or negative rates.

Watch: What are negative interest rates and how do they work?

Earlier this month Howard Davies, chairman of NatWest Group (NWG.L), said British banks were “not completely ready” for negative interest rates. He flagged possible technical and contractual issues. Consultants at PwC have compared negative interest rates with the Y2K computer bug.

Staley said Barclays was already dealing with negative rates in some of its European markets and was passing on the costs to large corporate clients.

“The bank is operationally prepared,” he said.

READ MORE: Barclays beats forecasts as it sets aside another £600m for COVID losses

Staley said it was “appropriate” for the Bank of England to be looking at negative interest rates as “a possible tool.” The policy is intended to spur economic growth by encouraging people and businesses to spend money rather than save it.

However, Staley said the policy can have unintended negative side effects.

“Negative interest rates can create things that really aren’t welcome,” he said. “You don’t want to see consumers, to avoid a negative interest rate market, going into cash for instance.”

He added: “It’s clearly a headwind for a bank, particularly if you’ve got a consumer franchise, if you’ve got close to zero interest rates let alone negative.”

READ MORE: Bank of England stokes negative interest rate speculation

Banks make much of their money from the difference between the interest rates charged to borrowers and the interest rates paid to savers. Low and negative rates compress this margin.

“We’d rather not have savings and deposits paying money as opposed to receiving money,” Staley said. “We don’t think that is where you ideally want to go to.”

Ultimately, Staley said that negative interest rates would benefit the bank in the long term if they were introduced.

“The long-term value of the bank clearly is inexorably tied to the economic resilience and strength of the country,” Staley said.

“Taking an accommodative monetary policy and possibly negative interest rates in order to make sure the economy stays on its feet is in the long-term benefit of our shareholders because it’s in the long term benefit of the bank.”

Staley said he did not think it was “likely” they would ultimately be introduced.

His comments came as Barclays reported better-than-expected third quarter results, boosted by a strong performance at its investment bank and its trading arm.