Why are we giving a £24bn-a-year subsidy to profitable commercial banks? | Letter
Source: Guardian Econ ↗
Gerald Holtham argues that the Bank of England should cease paying the full 3.75% policy rate on the roughly £640 billion of reserves held by commercial banks, a practice that transfers about £24 billion of public funds each year to profitable lenders. He contends that the interest payment is intended only to set a floor for banks’ lending rates and can be achieved far more cheaply by applying the rate to a limited portion of reserves rather than the entire amount.
Holtham proposes a “tranche” system in which each bank would have a designated slice of its reserves—perhaps 20%—that earns the policy rate, while any reserve reductions would first be drawn from this interest‑bearing portion. This approach would preserve the marginal cost signal to banks and maintain the effectiveness of monetary policy, yet would slash the subsidy by more than £19 billion annually. He notes that before 2006 the Bank of England never paid interest on reserves, and that raising rates typically boosts banks’ profits by allowing higher charges to customers, making the current full‑reserve payout an unnecessary extravagance.
By highlighting the scale of the subsidy and offering a concrete reform, Holtham frames the issue as one of fiscal responsibility rather than a need for a broader windfall tax on banks. He suggests that the Bank’s current practice reflects an “irresponsible attitude to public finances,” and that adopting the tranche model would align monetary policy with prudent use of taxpayer money while still achieving its intended regulatory effect.
⚡ Effects Interpreter
🌍World Economylow impact
What this means for you
- ▶Manufacturing hubs overseas may adjust output if demand signals change.
- ▶Forecasters often revise their outlook when data like this lands.
🏙️Local Economylow impact
What this means for you
- ▶Your take-home pay could feel an indirect pull from shifts like this.
- ▶Local hiring plans may firm up or soften as the wider trend becomes clear.
🏦Rates & Bankslow impact
What this means for you
- ▶Base rate decisions are usually made on data trends, not single headlines.
- ▶Your bank is unlikely to act on this alone, but it will be watching.
❤️Healthlow impact
What this means for you
- ▶Local health services might get busier depending on how things develop.
- ▶Community spirit typically steadies nerves when headlines feel unsettling.
💷Wealthlow impact
What this means for you
- ▶Diversified savings usually cushion the blow from stories like this.
- ▶Long-term savers usually ride out these modest bumps just fine.
🏠Housinglow impact
What this means for you
- ▶Landlords and tenants alike rarely feel sudden shifts from a story like this.
- ▶Renters may see costs drift a bit as landlords weigh their own bills.
🌍 Effects for your country
The U.S.'s central bank rate currently stands at 3.75%, so a global rates move like this could feed through to local borrowing costs. The U.S.'s economy is growing at 2.3% with inflation at 3.2%, the backdrop this story's effects play out against locally. Housing-market effects like this are usually felt most where mortgage rates track the U.S.'s own central bank rate closely. With the U.S.'s unemployment at 4.4%, personal-finance effects like this land on a labour market that is currently fairly stable. Health-system effects are harder to localise from economic indicators alone — the real impact in the U.S. depends more on local healthcare capacity than the figures above.
The UK's central bank rate currently stands at 3.75%, so a global rates move like this could feed through to local borrowing costs. The UK's economy is growing at 0.8% with inflation at 3.2%, the backdrop this story's effects play out against locally. Housing-market effects like this are usually felt most where mortgage rates track the UK's own central bank rate closely. With the UK's unemployment at 5.6%, personal-finance effects like this land on a labour market that is currently fairly stable. Health-system effects are harder to localise from economic indicators alone — the real impact in the UK depends more on local healthcare capacity than the figures above.
France's central bank rate currently stands at 2%, so a global rates move like this could feed through to local borrowing costs. France's economy is growing at 0.9% with inflation at 1.8%, the backdrop this story's effects play out against locally. Housing-market effects like this are usually felt most where mortgage rates track France's own central bank rate closely. With France's unemployment at 7.9%, personal-finance effects like this land on a labour market that is already under strain. Health-system effects are harder to localise from economic indicators alone — the real impact in France depends more on local healthcare capacity than the figures above.
Romania's central bank rate currently stands at 6.5%, so a global rates move like this could feed through to local borrowing costs. Romania's economy is growing at 0.7% with inflation at 7.8%, the backdrop this story's effects play out against locally. Housing-market effects like this are usually felt most where mortgage rates track Romania's own central bank rate closely. With Romania's unemployment at 6%, personal-finance effects like this land on a labour market that is currently fairly stable. Health-system effects are harder to localise from economic indicators alone — the real impact in Romania depends more on local healthcare capacity than the figures above.
The UAE's central bank rate currently stands at 3.65%, so a global rates move like this could feed through to local borrowing costs. The UAE's economy is growing at 3.1% with inflation at 2.5%, the backdrop this story's effects play out against locally. Housing-market effects like this are usually felt most where mortgage rates track the UAE's own central bank rate closely. Health-system effects are harder to localise from economic indicators alone — the real impact in the UAE depends more on local healthcare capacity than the figures above.