Rachel Reeves Warns of ‘dangers’ of Overhauling the Way the BoE Pays Interest on Commercial Banks’ Reserves - Latest Global News

Rachel Reeves Warns of ‘dangers’ of Overhauling the Way the BoE Pays Interest on Commercial Banks’ Reserves

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Rachel Reeves has warned of the “dangers” of restructuring the Bank of England’s interest payments to commercial banks, rejecting an idea that some economists said could help a Labour government find savings.

The shadow chancellor said on Tuesday that the main opposition party had “no plans” to “tier” the interest rates on commercial banks’ reserves at the BoE, which currently total around £770 billion.

Such a move, which would need to be approved by the Central Bank, could potentially save the public sector billions of pounds a year, but Reeves indicated in a press conference that this was out of the question.

Asked about the idea, Reeves said: “We have no plans to do that. And in fact, paying interest on reserves is part of the transmission mechanism of monetary policy. It is one of the ways in which higher interest rates trickle down to the real economy.”

“I don’t think that [changing the current system] without the dangers involved,” she added.

The idea of ​​changing the BoE’s interest rate payment policy has moved up the political agenda because the banking system has huge reserves as a result of quantitative easing, a program launched by the BoE in which it bought hundreds of billions of pounds to support the economy.

The BoE currently pays its key interest rate of 5.25 percent on all these reserves as it transmits monetary policy to the economy.

The interest that Britain’s largest branch banks earned on their reserves rose 135 percent last year to more than £9 billion, according to figures released in May by the UK Treasury’s special committee.

NatWest, Barclays, Lloyds and Santander will together receive £9.23 billion in interest on BoE deposits in 2023, the cross-party group of MPs said.

Economists have suggested that the BoE could move to a system in which banks are required to hold a fixed, interest-free amount of money, while the central bank pays its key interest rate on only a portion of those reserves.

Michael Saunders, an economist at consultancy Oxford Economics, said the savings from such a reform could amount to four to five billion pounds a year – depending on where the reserve requirements were set.

This would allow the BoE to continue to set money market rates at the level desired by its Monetary Policy Committee, he said, adding: “Technically, it is certainly feasible. And of course, it is comparable to a bank tax.”

But BoE chief Andrew Bailey is rather cautious about the idea. In February, he told a House of Lords committee that the system of paying the key interest rate on reserves “anchors the implementation of monetary policy.”

The BoE needs to be “very careful how we implement something like this,” Bailey said. “It’s a pretty substantial change and not one I would support at this time.”

Nigel Farage, leader of the right-wing Reform UK party, claimed on Monday that the government could raise £40 billion a year if it completely banned the central bank from paying interest on commercial banks’ reserves.

UK Finance, the banking industry association, warned after the arch-Brexiter’s intervention that a change in approach could lead to higher banking costs for consumers and businesses.

Reeves is under pressure to clarify whether a Labour government would raise taxes or accept the government’s existing spending plans, which include cuts to most departments after the July 4 election.

On Tuesday, she reiterated her promise not to raise income tax, VAT or social security contributions, saying: “I want taxes to be lower.”

However, Labour has not ruled out increases in other taxes, such as capital gains tax. This has sparked warnings that such an increase could deter investors from the UK and cause entrepreneurs to sell their companies.

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