UK should consider rate cut on bank reserves with BoE

Bean’s comments follow a proposal by another former BoE deputy governor, Paul Tucker, who said the government could save 30-45 billion pounds ($34-52 billion) a year by using a system where banks would receive interest at a fraction of their deposits with the BoE.

UK banks have around £950bn. in reserves at the BoE, mainly due to the more than £800bn reserves created to pay for purchases of quantitative easing that the central bank has not yet canceled.

Banks receive interest on reserves at the current BoE rate, which was 0.1% a year ago but 2.25% today and expected to rise further.

Until recently, the government received profits from the BoE’s bond-buying program when interest rates were low.

These flows have been reversed: now the government is footing the bill for the losses suffered by the BoE, which is paying higher interest rates on the bank reserves lined up for its quantitative easing programme.

With public finances increasingly strained by energy bill support programs and a shrinking economy, the cost of this responsibility is coming under increasing scrutiny.

“I think that’s one of the extra things that needs to be thrown into the picture,” said Mr.

BoE Governor Andrew Bailey said the current system is essential for transmitting changes in the BoE’s official interest rate to the wider economy.

However, Tucker, who served as deputy governor from 2009 to 2013 and is now a researcher at Harvard University, said similar effects could be achieved by paying interest on just £100bn of reserves.

Bean said a decision to pay interest on only a fraction of reserves was effectively a fiscal weapon as it took income from the banks.

“My view is that if the Treasury intended to go down this route, they would prefer to do so in the form of a bank levy,” Mr Bean said.

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