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BoE and PRA Request to Understand Impact of Zero or Negative Bank Rate

FCA


13 October 2020

BoE and PRA Request to Understand Impact of Zero or Negative Bank Rate

The Bank and the prudential regulator have asked certain firms, including insurers, to provide an assessment of system changes to accommodate such a Bank Rate and other steps necessary alongside a change, estimating time and cost.

Whilst "not indicative that the MPC will employ a zero or negative policy rate", assuming such a change results in lower swap rates, this would push the short term risk free rates (used to value liabilities under the Solvency II regime) lower still, with end September 2020 UK spot rates already negative for terms less than 4 years.

Insurers and friendly societies should already have a good understanding of the effects of interest rate movements as a result of their own risk and solvency assessments. This should also look at the effect of asset movements.

https://www.bankofengland.co.uk/prudential-regulation/letter/2020/info-request-operational-readiness-policy-rates

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