Slowing bond sales and limiting interest on bank reserves would save chancellor £5.5bn a year

The government could save £5.5bn in a scenario where the Bank of England slowed its quantitative tightening and reduced the interest it pays to commercial banks on reserves, according to new analysis from the New Economics Foundation and Positive Money.

This would help recover some of the costs of the Bank’s quantitative easing programme, which is forecast to cost the Treasury £18bn a year up until 2031.

The analysis comes ahead of Thursday’s monetary policy committee decision, where they will announce whether the Bank will slow down its quantitative tightening.

Currently, the Bank pays commercial banks interest on the entirety of the reserves it holds for them. The £5.5bn saving is based on a tiered reserves policy of 4%, where the Bank would pay no interest to banks on required reserves of 4%. This is similar to the policy adopted by the Swiss National Bank.

If the Bank went further and introduced a 10% reserves requirement, similar to what the UK had in the 1970s, this combined with slowing bond sales would save the government £9bn a year.

Jaya Sood, senior economist at the New Economics Foundation, said:

“Whilst families continue to struggle with the cost of living crisis, banks continue to profit from a stealth subsidy from the exchequer worth billions as a direct result of decisions around how the Bank of England administers monetary policy.

“A range of options are available to the government and the Bank of England to lower these costs, all that is missing is a willingness to change their approach.”

Simon Youel, Head of Policy and Advocacy at Positive Money, said:

“Rather than cutting departmental spending or raising taxes on ordinary working people, John Healey should tackle the billions of pounds being transferred from the government to bank shareholders as a side effect of the Bank of England’s monetary policy decisions.

“There are no shortage of solutions available to the Bank of England or the Treasury to insulate the public finances from the impact of tighter monetary policy, just a concerning lack of coordination between the two on how to fix the problem.”

These recommendations are part of a suite of policies put forward by the New Economics Foundation and Positive Money to address the growing cost of monetary policy to the Treasury. Other options for addressing these costs would include:

• A windfall tax on banks set at 38%, which could raise up to £19bn next year. This would also recoup the profits commercial banks have made from not passing higher interest rates onto customers’ savings accounts)

• Rewriting the indemnity so the Treasury no longer finances Bank losses

• Improving coordination between the Bank and the government when issuing and selling gilts to markets respectively

Notes
A link to the New Economics Foundation and Positive Money briefing can be found here: https://​newe​co​nom​ics​.org/​2​0​2​6​/​0​9​/​o​p​t​i​o​n​s​-​t​o​-​r​e​d​u​c​e​-​t​h​e​-​f​i​s​c​a​l​-​c​o​s​t​s​-​o​f​-​m​o​n​e​t​a​r​y​-​p​olicy

The figures are modelled against the OBR’s March 2026 forecast and are savings on day-to-day government spending, averaged over the five years to 2030 – 31. The tiered reserves figures assume the Bank stops paying interest on a required portion of reserves (4% or 10% of broad money) while leaving at least £350bn earning Bank Rate in full, following the design NEF published in 2022 and 2023. The slower QT figures compare a fully passive unwind, in which the Bank stops selling gilts and lets them mature, against the OBR’s assumption of £32bn of active sales a year, and use the Bank of England’s own estimate that quantitative tightening has raised 10-year gilt yields by 20 to 30 basis points. Both include the knock-on effect on debt interest: a smaller loss means the Treasury issues fewer gilts, which saves interest in later years.

The New Economics Foundation is a charitable think tank. We are independent of political parties and committed to being transparent about how we are funded. Find out more: www​.newe​co​nom​ics​.org

Positive Money is an international research and campaign organisation working to redesign our economic system for social justice and a liveable planet. Set up in the aftermath of the financial crisis, Positive Money is a not-for-profit company funded by charitable trusts and foundations, as well as small donations from its network of supporters. Find out more: www​.pos​i​tive​money​.org