Tax the lenders over QE losses, urges Bank

Chief economist dismisses calls to stop paying interest on reserves held by commercial bodies

MINISTERS should force banks to pay more tax if they want to claw back losses from the Bank of England’s bond buying scheme, according to Threadneedle Street’s chief economist.

Huw Pill dismissed calls for the central bank to stop paying interest on reserves held by commercial lenders, which could save the Treasury more than £100bn.

“If governments want to tax banks or they want to subsidise banks, they should do that transparently. They shouldn’t do it through the central bank balance sheet hoping that nobody notices,” he added.

The Government’s own economic adviser warned that the policy would be a “disaster”. Gertjan Vlieghe said it would amount to a “default” if it stopped payments.

Threadneedle Street’s near-£900bn quantitative easing programme saw an equivalent amount of reserves created at the central bank, which earns interest at Bank Rate.

In the wake of the financial crisis, when interest rates hit record lows, this was more than covered by income earned on government bonds bought by the Bank, which handed £120bn in quantitative easing profits to the Treasury.

Now that interest rates have climbed from 0.1pc to 3pc, official forecasts show the taxpayer will be on the hook for £133bn as the Bank starts to reverse the programme.

Mr Pill described paying interest on reserves as “one of the key principles” of its framework. “Anything that interferes with that is something I think the bank cannot accept because it is interfering with the core task of the Bank,” he told a conference in London.

Mr Vlieghe, who currently serves on the Treasury’s Economic Advisory Council, warned the Bank could “lose control” of its ability to boost or cool the economy. “Not paying interest on reserves is a disaster,” he said. “I wouldn’t recommend any government do that.

“If you want to tax the banks, fine. Just put a tax on them rather than saying, ‘I owe you a lot of money. And as we know, when you owe money you pay interest on it. I’m just not going to pay you.’ That’s a default in my book.”

It came as another Bank deputy described Threadneedle Street’s economic forecasts as too gloomy.

Sir Dave Ramsden noted that the Bank was much more pessimistic about the outlook for growth and inflation than other City forecasters.

He said big changes to the economy after the pandemic, including a decline in the size of Britain’s workforce, meant it could no longer rely on old economic models to predict the future.

Sir Dave said that while an uptick in joblessness from the current rate of 3.6pc was likely as the economy cools, he was “materially less confident” about the Bank’s prediction for around half a million more people out of work by the end of next year. He added that policymakers should be more “sensitive to errors” given the heightened uncertainty surrounding the economy.