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BOE's Top Economist Rejects Calls to Cut Interest Rates

Bank of England Chief Economist Huw Pill has dismissed calls for the central bank to cut the interest it pays on reserves held by commercial lenders. Pill said that such a move would not be effective in stimulating the economy.

November 24, 2022
4 minutes
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Bank of England Chief Economist Huw Pill has dismissed calls for the central bank to cut the interest it pays on reserves held by commercial lenders. Pill said that such a move would not be effective in stimulating the economy.

Pill stated that if governments want to tax banks or subsidize them, they should do so transparently, rather than through the central bank balance sheet in a way that is not noticeable. This was said at a conference located in London.

The Bank of England's £895 billion quantitative easing program has created an equivalent amount of reserves. The central bank pays interest on those reserves at the benchmark rate, which is currently higher than the income earned on government bonds bought by the BOE with the money it created.

The Bank of England's aggressive policy of raising interest rates to fight inflation is now costing the Treasury billions of pounds. Rates have risen from 0.1% to 3% in a year and are expected to reach 4.5%.

The gains made by high street banks have been likened to a windfall. Former BOE Deputy Governor Paul Tucker is among those who advocate cutting remuneration to save taxpayer money.

Pill's opposition was reinforced by former BOE policymaker Gertjan Vlieghe, who said that ending reserve payments would be a "disaster" and would disrupt the working of monetary policy.

Since 2009, reserves have been remunerated in order to ensure that BOE policy is passed through to the economy via the banks. For holders of reserves, making loans to consumers and businesses is only worthwhile when it pays better than making risk-free loans to the BOE.

"If you want to tax the banks, that's fine," Vlieghe told the Bank of England Watchers' conference. "Just put a tax on them. But don't say that I owe you a lot of money, and then refuse to pay the interest on it. That's a default in my book."

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