"Bank of England questions banks over negative rates"

From the BBC:

While the Bank of England may set its base rate below zero, it is unlikely most consumers will immediately enter the topsy-turvy world of being paid to borrow money. Those on fixed-rate mortgages will see no difference, while variable-rate mortgage terms often state that borrowers will never pay less than zero.

Savers with deep pockets such as the wealthy and the banks themselves, may be charged to deposit their money. Banks depositing cash overnight at the European Central Bank currently pay 0.5% to do so. In November, Swiss bank UBS began charging up to 0.75% for cash deposits from wealthy clients.

From the BoE:

Bank Rate determines the interest rate we pay to commercial banks that hold money with us. It influences the rates those banks charge people to borrow money or pay on their savings.

This is Emperor's New Clothes stuff. Read the bit in bold!

I know that commercial banks are required by regulations to deposit a certain amount of money with the BoE, so the BoE can pay any old interest rate it likes on that, even if that is negative i.e. the BoE can charge commercial banks for holding their money. That's just a cost of doing business or a modest payment towards the value of a banking licence.

I know that there are some loan agreements where the interest rate is expressed as the BoE base rate plus or minus a certain percentage, so the contractual rate might go negative (unless the loan agreement stipulates a minimum interest rate).

And I know that in extremis, if most banks were perceived as risky, then people would accept a (small) negative interest on their deposits with those banks perceived as safe (whereby NS&I is the central bank for mere mortals), just for the peace of mind.

But there's no underlying economic reason why it should happen. It's pushing a piece of string. If it were the other way round, and banks could borrow from the BoE for negative interest rates, they would have more money to lend on to borrowers and so they might well drop the interest rates they charge. But they aren't. They are just losing money on the token amounts that they have to deposit with the BoE. So you might as well argue, commercial banks will push up the rates they charge borrowers to try and make up the shortfall (or indeed reduce deposit rates to make up the shortfall). But they are already charging as much (or paying as little) as they can get away with.

Banks do not take deposits from customers with the sole purpose of depositing them with the BoE, that just wouldn't be worth the hassle. So it's not like commercial banks have to reduce the interest rates they pay to discourage people from depositing with them. If they can get away with it, they will do it, whatever the base rate is.