Beware Farage’s £40bn raid on banks – there is no such thing as a free lunch

It never seemed likely that the arcane subject of the payment of interest on commercial banks’ deposits at the Bank of England would come to be a topic of conversation down the Dog and Duck. But this is apparently what has happened after Nigel Farage discussed the policy of not paying such interest on the Laura Kuenssberg TV programme last week. I have written on this topic before, but now that it is figuring in the election campaign – it is a key Reform policy – it deserves another look. Does this offer an attractive option for a cash-strapped government? (Be warned: this is not a subject for the economically faint-hearted.) At issue is the Bank of England’s practice of paying the base rate of interest on any deposits held by commercial lenders at Threadneedle Street. The cost of this arrangement has risen because of quantitative easing (QE) and, because of the way the system was set up, taxpayers are footing a significant portion of the bill. The Bank of England’s balance sheet was inflated hugely by the QE programme. In 2006 to 2007, commercial banks’ reserves at the Bank were on average only about £20bn. By contrast, they currently...

Read more