Central Banks' £24bn Annual Subsidy to Profitable Commercial Banks

The Bank of England pays commercial banks £24 billion annually in interest on their reserve deposits. This is a long-standing practice, but experts argue it's unnecessary and extravagant. The policy aims to control lending rates by establishing a floor.

However, paying interest on the entirety of the reserves, rather than just a marginal slice, means handing over more public money than required for policy purposes. By changing this approach, the Bank could make significant savings, potentially around £19 billion per year.

Gerald Holtham points out that before 2006, the Bank never paid commercial banks anything on reserves and that raising interest rates often increases banks' profits anyway by allowing them to charge customers more. He suggests that paying out more public money than necessary is an irresponsible attitude towards public finances.