MNI POLICY: BOE Steering Clear Of Reserve Remuneration Change

There is no sign the government will press the Bank of England to reduce interest it pays on reserves, a move which could save the public sector tens of billions of pounds a year and which has been recommended by former Deputy Governor Paul Tucker and other former senior BOE officials.

With the Treasury planning big tax rises and spending cuts in its Nov 17 statement, introducing a tiered system slashing rates on the reserves paid to banks in return for bonds they sold during quantitative easing could save around 1.6% of GDP in 2023–24 and 1.2% in 2024–25, according to Tucker, who assumed the BOE would press ahead with plans to sell some of its gilts.

But Governor Andrew Bailey has said he would view such a move as essentially a tax on banks and so fiscal, not monetary, policy. And, so far, Chancellor Jeremy Hunt seems not to have suggested it, with reports suggesting his focus is more on income tax thresholds and changes to capital gains tax.

FISCAL DOMINANCE

Another former deputy governor, Charles Bean, has suggested that to avoid the perception of fiscal dominance the Treasury could impose a windfall tax on banks equivalent to the amount it would save in interest payments by ending full reserve remuneration. Bean, though, together former senior Bank official David Aikman, told MNI in interviews that a switch to tiered reserve remuneration is do-able from a technical perspective, because it is the rate of interest on marginal reserves, rather than the stock, that is key for implementing monetary policy. (See: MNI INTERVIEW: Bank Tax Better Than Tiering- Ex-BOE Deputy)

Cutting reserve remuneration could drive up the cost of financial intermediation. Tucker's report acknowledged that altering the reserves regime would cut banks' income, and raised the question of whether, while the state would gain directly from lowering debt interest payment, it could also lose revenues due to the higher cost, and lower availability, of credit.

Banks are already subject to a bank levy but the revenue raised is not remotely comparable to that from a change in remuneration. The Office for Budget Responsibility has estimated that the bank levy will raise GBP1.3 billion in 2022-23, or just 0.1% of GDP.