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Cutting interest paid on Bank of England reserves would be bad, Treasury minister says

Published 12/03/2024, 17:12
Updated 12/03/2024, 17:16
© Reuters. The Bank of England is seen in the City of London, Britain, July 30, 2023. REUTERS/Hollie Adams/File Photo

LONDON (Reuters) - It would be a bad idea for Britain to try to reduce pressure on the public finances by cutting the amount of interest the Bank of England pays on reserves held there by commercial banks, a junior Treasury minister said on Tuesday.

Some former BoE officials have said the government could save tens of billions of pounds a year by moving to a system where banks would receive interest on only a proportion of their deposits at the BoE.

Such a move has been opposed by Governor Andrew Bailey, who said it would lessen the impact of interest rate changes.

Bim Afolami, economic secretary at the finance ministry, said changing reserve remuneration would not be a sensible way forward.

"I think that's actually a very radical proposal. I don't think it would be helpful, it affects monetary policy transmission. I think it would be very disruptive and for a lot of other reasons I don't agree," Afolami told the House of Lords' Economic Affairs Committee.

Government official Ruth Curtice, director of the finance ministry's fiscal group, told the committee that she agreed.

British banks hold just under 800 billion pounds ($1 trillion) of reserves at the BoE, largely as a result of more than 732 billion pounds of reserves created to pay for quantitative easing bond purchases that the central bank is yet to reverse.

Banks receives interest on the reserves at whatever is the BoE's current interest rate - just 0.1% in 2021, but 5.25% now.

Through the 2010s, the government received profits made by the BoE's bond purchase programme when interest rates were low.

Those flows have now reversed: the government foots the bill for any losses the BoE makes as it pays higher interest on bank reserves issued for its QE programme.

With public finances under growing strain from energy bill support schemes and a stalling economy, the cost of this liability has come under increasing scrutiny.

© Reuters. The Bank of England is seen in the City of London, Britain, July 30, 2023. REUTERS/Hollie Adams/File Photo

The BoE now expects from the QE programme losses will exceed the profits made during the 2010s, resulting in a net loss of 50-80 billion pounds in today's money by the mid-2030s.

($1 = 0.7827 pounds)

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