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Bank of England’s massive payment to bankers almost quadruple the amount announced in May to ease the cost of living for struggling families

Banking sector to be handed a stealth subsidy of £57bn in the next three years due to interest rate rises

The Bank of England will be handing out a stealth subsidy of £57bn to the banking sector over the next three years if interest rates continue to rise as planned, according to a report by the New Economics Foundation (NEF), out today. Against the backdrop of the extreme rise in the cost of living, this massive payment to commercial banks would be enough to fully retrofit over 19m UK homes or send every household a £2000 cheque, cancelling out the rise in the energy price cap. It is almost quadruple the amount announced in May by the chancellor to help struggling families with the cost of living.

The report sheds light on the fact that, when interest rates rise, the Bank of England sends greater amounts of money to the banking sector, despite the sector not providing any additional services, boosting the profits of commercial banks at the government’s expense. The Bank will make its next decision on interest rates on Thursday, and will be looking to use interest rates to influence the high levels of inflation causing the cost of living crisis.

Interest rates are expected to rise to 2.5% by next summer, and then fall to 2.0% by January 2025. The report finds that this would result in the Bank sending commercial banks £15.08bn of public money by 2023 and £57.03bn by 2025 even as the quantitative easing policy is unwound. These significant payments will most likely boost the profits of the banking sector, where pay rises were treble the national average last year, the report finds.

When the Bank’s interest rate rises, the Bank has to pay a higher amount to commercial banks for holding central bank reserves. The banking sector currently holds nearly £1 trillion of central bank money as a result of the money creation programme known as quantitative easing. Interest payments on all central bank reserves were introduced in 2009, as a response to the global financial crisis. The report argues that this is historically unusual: in 2009, unlike today, inflation levels were dangerously low and central bank reserves were much smaller. Prior to the 2007 – 2008 financial crisis, the Bank of England did not pay interest on all the reserves held by banks.

The NEF report argues that this policy is out-of-date, unnecessarily expensive and in need of a reboot. The report proposes the Bank of England imitate the Eurozone and Japan by implementing what is known as a tiered reserves policy framework, by only paying interest on a portion of central bank reserves, or stopping paying interest all together. The report finds that this is a more nuanced way of controlling inflation that could save the government £10 – 15bn by March 2023, and £25 – 57bn by March 2025.

The report finds that the stealth subsidies sent to the banking sector by 2025 would be enough for the government to either:

  • Reverse all cuts to social security since 2010;
  • Fully insulate and upgrade over 19m UK homes;
  • Send every household in the UK £2000.

Frank Van Lerven, senior economist at the New Economics Foundation, said:

While families up and down the country are worrying about how they will afford their next grocery shop or energy bill, the Bank of England will be busy sending billions to bankers. It’s only been a matter of years since we didn’t have to pay interest on our central bank reserves – this is an exception, not the historic norm. We are left with a dangerously out-of-date policy which isn’t designed to address the challenges of today’s economy – a reserves policy that pays no interest would be a better way of controlling inflation.”


The New Economics Foundation is a charitable think tank. We are wholly independent of political parties and committed to being transparent about how we are funded.

The report, Between a rock and a hard place, is available on the New Economics Foundation website at https://​newe​co​nom​ics​.org/​2​0​2​2​/​0​6​/​b​e​t​w​e​e​n​-​a​-​r​o​c​k​-​a​n​d​-​a​-​h​a​r​d​-​place

Stealth subsidy of £57bn based on Bank of England calculation of market expectations of their base rate over the next 3 years applied to the Bank of England’s changing stock of reserves implied by unwinding quantitative easing.

Savings from tiering reserves are calculated from a comparison of the current system to a tiered reserve system where the value of the stock of central bank reserves gained between August 2016 – November 2021 are put onto a lower interest rate between 0.1% (lower estimate for savings) to a dynamic negative rate that adjusts so payments to banking sector net to zero (higher estimate for savings).

Figure for reversing cuts to social security based on previous NEF research that suggests £14bn has been taken from the welfare system since 2010.

Figure for retrofitting 19m homes based on an average cost of £2900 from the government’s household energy efficiency statistics.

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