Critics call for ending the £24bn annual Bank of England reserve subsidy to banks

In a recent opinion piece, Gerald Holtham criticizes the Bank of England’s practice of paying a 3.75% rate on about £640bn of commercial-bank reserves, which transfers roughly £24bn of public money to private banks each year. He argues that this subsidy is unnecessary because the interest payments are meant only to set a floor for lending rates, a goal that could be achieved by applying the rate to a modest slice of reserves instead.

By designating, for example, a 20% tranche, the Bank could retain the same marginal cost to banks while cutting the annual outlay by over £19bn. Holtham notes that before 2006 the Bank never paid interest on reserves, and that raising rates naturally increases banks’ earnings as they can charge higher loan rates. He concludes that the current approach is an extravagant misuse of public funds and signals an irresponsible attitude toward fiscal management.