(Bloomberg) -- The UK government would save about £1 billion ($1.3 billion) a year if the Bank of England copied the European Central Bank and cancelled interest on some of the money it controls, according to Numis analyst Jonathan Pierce.
The ECB last week said it would stop paying commercial banks interest on some €165 billion (£141 billion) of deposits they're required to keep at the central bank as a minimum reserve.
Pierce calculated that an equivalent “minimum reserve requirement” in the UK would be £20 billion, on which the BOE is currently paying 5% interest – or about £1 billion a year. The move if adopted would ease strains on the UK Treasury, which has indemnified the central bank against losses.
The BOE is paying increasing costs on reserves it holds for banks, reached almost £1 trillion during the quantitative easing stimulus program that finished in 2021. Those losses are ultimately borne by the taxpayer under a state-backed guarantee for the costs the BOE racked up with the QE assets it started buying in 2009.
Roughly £15 billion has already been transferred from the government to commercial banks through the BOE since October, and more than £100 billion will be paid by the taxpayer over the next few years, the BOE's own forecasts show.
Pressure groups including Positive Money have said the BOE should cancel the interest payments on its reserves or that the government should impose a windfall tax to capture what it describes as “unearned profits” by the banks. A paper by former BOE Deputy Governor Paul Tucker last year also urged governments to look into ways of reducing interest paid on reserves.
The BOE has refused to address the issue, saying scrapping interest payments on reserves would effectively be a tax on the banks and was therefore a decision for the government. The government says it's an issue for the BOE.
The ECB said it took the decision to “preserve the effectiveness of monetary policy” by improving the transmission of its rate rises to the economy and therefore helping to bring down inflation. The BOE has complained of similar pass-through problems recently, saying its policy transmission is not working as well as it used to because more mortgage holders have locked in rates for longer than in previous tightening cycles.
Numis's Pierce has been warning for months that a possible change to reserve remuneration rules poses a risk to bank share prices. Copying the ECB policy would “equate to a profit hit of 2%-3%” for the major high street banks, he estimated.
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