David Milliken

LONDON, (Reuters) – Rishi Sunak, the British finance minister said Tuesday that he has not been considering changing the remuneration of the cash reserves banks keep at the Bank of England. This would harm the effectiveness of the BoE.

British legislators asked the finance minister in July to examine whether banks could pay interest only on a portion of their BoE reserves. This would reduce the negative impact of higher BoE rates on public finances.

Sunak stated in a public appearance before the House of Lords Economic Affairs Committee that this was not a feasible option.

Sunak explained, “That’s not something we have been actively considering recently.”

“Wherever you’ve seen reserve payment tiering, it is in the cases of a policy with a negative rate. It is not possible to see this in cases where the policy rate is positive. He said that it would reduce transmissions of monetary policies.”

A negative interest rate is charged on deposits at banks by the European Central Bank. However, the European Central Bank exempts some of these reserves from its negative rate through tiering.

Many financial markets expect that the BoE will increase interest rates by 0.2% to 0.25% on Thursday. It is the first time a major central bank has done so since the beginning of the COVID-19 pandemic.

A House of Lords committee, whose members also include Mervyn K. King, a former BoE governor, has previously criticised BoE quantitative ease and expressed concern about the possibility that central banks could feel political pressure to not raise interest rates for the effect on the public finances.

Sunak turned down a request by the committee for a publication of a document outlining the indemnity the BoE has received from the finance ministry to pay any losses resulting from the 895 billion pound asset acquisition programme.

($1 = 0.7345 pounds)