Britain should consider changing the Bank of England’s policy to pay banks interest on the reserves they hold there, former BoE Deputy Governor Charlie Bean said on Tuesday.
Bean’s comments follow a proposal by another former BoE Deputy Governor, Paul Tucker, who said the government could save 30 to 45 billion pounds ($34 to $ 52 billion) a year by moving to a system where banks would receive interest on a fraction of their deposits with the BoE.
UK banks hold around £ 950 billion in reserves with the BoE, largely due to more than £ 800 billion in reserves created to pay for bond purchases under the quantitative easing that the central bank has yet to roll back.
The banks receive interest on the reserves at the current interest rate of the BoE – a year ago only 0.1%, now 2.25% and that will rise even further.
Until recently, the government received profits from the BoE’s bond purchase program when interest rates were low.
Those flows are reversed: now the government is paying the bill for all the losses the BoE is making by paying higher interest on bank reserves issued for its QE program.
With public finances under increasing pressure from energy bill support schemes and a stagnant economy, the cost of this obligation is becoming increasingly critical.
“I think it’s one of the extra things to throw into the mix,” Bean said of changing the policy on paying interest on reserves at a Resolution Foundation think tank event.
Governor Andrew Bailey of the BoE has said the current system is essential to pass changes in the BoE’s official interest rate to the broader economy.
However, Tucker, who was vice governor from 2009 to 2013 and is now a researcher at Harvard University, said similar effects could be achieved by paying interest on just £ 100 billion in reserves.
Bean said paying interest on just a fraction of the reserves was in fact a fiscal weapon, as it took income away from the banks.
“I think if the Treasury wanted to go down this road, it would prefer to do it in the form of a bank tax,” Bean said.
