The Hidden Cost of Saving UK Taxpayers Billions of Pounds
Interest rates on central bank reserves are set to increase. But canceling those payments endangers the transmission of UK monetary policy.
Rishi Sunak is hunting for savings
Photographer: Alex Kraus/Bloomberg
With inflation soaring and official UK interest rates and government borrowing costs set to head even higher in the coming months, the hunt for savings in tight public budgets is on. So, a proposal that the British government could save nearly 60 billion pounds ($74 billion) over three years by not giving free handouts to banks sounds like a slam dunk.
The idea put forward by the New Economics Foundation think tank is deceptively simple. Rising official rates mean the Bank of England will start paying more interest on the billions of extra bank reserves created to buy government bonds in its quantitative-easing programs. The NEF and others question why taxpayers’ money should be spent on giving banks a nice return on spare cash that looks like it’s just sat around doing nothing. After all, Chancellor of the Exchequer Rishi Sunak is scrabbling for funds to help people cope with a growing cost-of-living crisis.