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Calls grow to end the Bank of England’s 3.75% bank reserves payout

The proposal would replace the current 3.75% interest on about £640bn of bank reserves with a smaller marginal structure, aiming for more than £19bn a year in gross savings.

Reported · Written up by our desk · Europe

The Guardian Economics published a letter arguing that the UK should stop paying commercial banks policy interest on their reserve deposits at the Bank of England, rather than introducing a windfall tax.

The letter estimates the current arrangement pays 3.75% on roughly £640bn of reserves, which it says amounts to about £24bn a year of public money to profitable lenders.

It contends the Bank of England pays interest on the whole reserve balance mainly to establish a floor for lending rates, but that the same policy effect could be achieved more efficiently by paying interest on a marginal slice of reserves instead.

The writer proposes that the Bank could set interest-bearing tranches for each bank and treat reserve reductions as coming first from the non interest-bearing portion, estimating that a 20% tranche could produce gross savings of more than £19bn a year.

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