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* BoE sees risks if negative rates used in under 6 months
* Sterling jumps as investors see less chance of sub-zero
rates
* A cut to zero would be less difficult - Woods
* BoE working on new guidance for easing stimulus
* UK economy seen shrinking by 4% in Q1
* 2021 growth forecast cut, 2022 estimate raised
(Adds comment from BoE's Woods, BlackRock strategist)
By Andy Bruce, David Milliken and William Schomberg
LONDON, Feb 4 (Reuters) - Britain's banks need at least six
months to prepare for any cut in interest rates below zero, the
Bank of England said as it kept its stimulus programmes on hold
ahead of what it hopes will be an economic recovery later this
year.
The pound jumped by more than half a cent against the U.S.
dollar and British government bond yields climbed as investors
scaled back their bets that the BoE will implement sub-zero
rates anytime soon.
The central bank published on Thursday the results of its
review of how prepared lenders such as HSBC, Lloyds and Barclays
are for any move to bring in such a policy in Britain for the
first time.
"Although the BoE might like to add negative rates to their
toolkit, they indicated today that this is at least six months
away," Vivek Paul, UK chief investment strategist at the
BlackRock Investment Institute, said.
"Very real implementation challenges of a move sub-zero
continue to exist and the prospect of dipping into negative
territory this year remains low."
The committee said it did not want send a signal that it
intended to set negative rate but it "would be appropriate to
start the preparations to provide the capability to do so if
necessary in the future."
Deputy Governor Sam Woods said most financial firms would
need to make changes to their systems to implement a negative
rate but cutting Bank Rate to zero would pose less of an
operational challenge.
Britain's economy would probably shrink by 4% in the first
three months of 2021, the central bank said, but it was expected
to recover rapidly towards pre-COVID levels over 2021.
Most businesses are once again hobbled by a third national
coronavirus lockdown since the pandemic struck last year,
hitting the economy harder than any of the other Group of Seven
rich nations, according to official data.
Many firms are also grappling with post-Brexit barriers to
trade with the European Union after Britain left the bloc's
single market on Dec. 31.
But Governor Andrew Bailey has previously said progress on
COVID-19 vaccines - which have been rolled out in Britain far
faster than in the rest of Europe - was "outstandingly good
news" and he predicted a pronounced economic recovery.
RECOVERY PROSPECTS
The BoE maintained its Bank Rate at 0.1% and left the size
of its total asset purchase programme at 895 billion pounds
($1.22 trillion), as expected.
It lowered its forecast for British economic growth for this
year as a whole to 5% from its November forecast of 7.25% but it
raised its forecast for growth in 2022 to 7.25% from 6.25%.
It stuck to its previous forecast that the economy would
return to its size at the end of 2019, before the pandemic
struck, by the first quarter of 2022.
The BoE also said it was working on developing a new message
for investors and businesses about when it might start to remove
the huge stimulus in place for Britain's economy.
"The Committee agreed to ask Bank staff to commence work to
reconsider the previous guidance on the appropriate strategy for
tightening monetary policy should that be required in the
future," it said.
(Writing by William Schomberg; Editing by Toby Chopra)
