By David Milliken
LONDON -British finance minister Rishi Sunak said on Tuesday he had not considered changing the remuneration of cash reserves that banks hold at the Bank of England, as this would damage the BoE’s effectiveness.
British lawmakers asked the finance ministry in July to review whether paying banks interest on only part of the reserves they hold with the BoE could be a way to reduce the impact on the public finances of higher BoE interest rates.
Sunak said in an appearance before the House of Lords’ Economic Affairs Committee, which made the request, that he did not view this as a realistic option.
“That’s not a policy we have actively considered recently,” Sunak said.
“Where you have seen tiering on reserve payments is only in those cases…where there’s a negative interest rate policy in place. You haven’t seen that where there are positive policy rates. It would obviously act to reduce the transmission of monetary policy,” he added.
The European Central Bank, which has a negative interest rate on bank deposits, exempts a portion of the reserves which banks hold with it from this negative rate in a form of tiering.
Financial markets widely expect the BoE to raise interest rates to 0.25% from 0.1% on Thursday, the first major central bank to do so since the start of the COVID-19 pandemic.
The House of Lords committee – whose members include former BoE Governor Mervyn King – previously criticised the scale of BoE quantitative easing, and expressed concern that the central bank could come under political pressure not to raise interest rates because of the impact on the public finances.
Sunak rejected a request from the committee to publish a document detailing the indemnity that the finance ministry has given the BoE to cover any losses from its 895 billion pound ($1.22 trillion) asset purchase programme.
($1 = 0.7345 pounds)