Bank of England must pay interest on reserves, says Huw Pill25 Nov 2022 07:06
The Bank of England should not lower the rate of interest it pays on reserves held by commercial banks, the Bank’s chief economist has said, amid warnings that changing the rules could be tantamount to a debt default.
Huw Pill, also a member of the Bank’s monetary policy committee, rebuffed suggestions that the central bank could offer “tiered” rates on reserves held at the Bank by commercial lenders, an idea that has been touted as a way to stem billions of losses it is suffering on £836 billion of bonds.
Rising interest rates mean the Bank is paying a higher interest rate on commercial reserves than it makes on its vast portfolio of gilts bought during more than a decade of quantitative easing. Last week the Office for Budget Responsibility warned that the Treasury would need to transfer £133 billion to the Bank in the next six years to cover losses made on its bond holdings.
Reducing interest paid by the Bank on commercial reserves would help to lower the costs to the government and save the taxpayer billions.
Jeremy Hunt has told MPs that he had asked advice from the Bank on its easing losses within the boundaries of the central bank’s independence.
In the first comments by a member of the MPC on the issue, Pill told a conference in London yesterday that he was “not a fan of the proposal” to change the remuneration on reserves.
“Anything that interferes with [reserve remuneration] is something that I think the Bank cannot accept because it is interfering with its core task,” he said. “If governments want to tax banks or they want to subsidise banks, they should do that transparently, [not] through the central bank balance sheet and hope that nobody notices. It begins to blur the relationship between central banks and other actors.”
Jan Vlieghe, a former member of the MPC, said not paying the full interest rate on commercial bank reserves could be the equivalent of a debt default and a “really, really bad signal to send”.
He said: “When you’re in an environment where you are worried about perceptions of fiscal dominance and perceptions about the government reducing the independence of the Bank of England, this is a really, really bad signal to send. I would not recommend any government to do it.
“If you say to the banks, I owe you a lot of money but I’m not going to pay it, that’s a default in my book.”
The Bank has started to gradually reduce the stock of more than £800 billion in bonds on its balance sheet to help to reduce losses in a process known as quantitative tightening. It started selling gilts back to the market this month and held an auction yesterday to sell £750 million of gilts to investors, with orders two times over-subscribed.
The Treasury indemnifies any lossess suffered by the Bank on its easing and transferred its first tranche of cash to cover losses incurred under the scheme last month.
https://www.thetimes.co.uk/article/bank-of-england-must-pay-interest-on-reserves-says-huw-pill-29hz
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