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Reform UK clashes with Bank of England over interest payments to lenders

by June 9, 2025
June 9, 2025
Reform UK clashes with Bank of England over interest payments to lenders

The Bank of England has dismissed calls from Reform UK to end interest payments to commercial banks on reserves, despite mounting political pressure over what critics claim is a vast and unnecessary drain on the public purse.

In a letter to the Bank’s governor, Andrew Bailey, Reform UK’s deputy leader Richard Tice (Pictured) accused Threadneedle Street of “enriching City institutions” to the tune of tens of billions of pounds, saying the current system had become “an unaffordable luxury” at the taxpayers’ expense.

At the heart of the row is the legacy of quantitative easing (QE) — the Bank’s £895 billion bond-buying programme launched during the global financial crisis and expanded in response to the pandemic. When the Bank purchased government bonds from commercial lenders, it credited their reserve accounts at the central bank. Today, those reserves total about £700 billion and are remunerated at the Bank’s base rate, currently 4.25%.

Reform UK argues that paying interest on these reserves is unnecessary and should be scrapped immediately — a move they claim could save up to £35 billion annually and help fund a “Great British tax cut”. Tice labelled the payments “voluntary interest” on money that was “created out of thin air” and insisted that commercial banks “cannot believe their luck” as rising interest rates have delivered windfall gains.

Indeed, Britain’s biggest high street lenders — Barclays, Lloyds, NatWest and Santander UK — disclosed last year that they collectively earned £9.2 billion in 2023 in interest on their central bank reserves. Reform and other critics — including former prime minister Gordon Brown and ex-deputy governors Sir Charlie Bean and Sir Paul Tucker — say it’s time to rethink a policy they argue is outdated and overly generous.

But the Bank of England is standing firm. Speaking to the Treasury Select Committee last week, Bailey defended the current approach, warning that scrapping interest payments could backfire by encouraging banks to withdraw their reserves from the central bank and instead invest in government bonds. Such a shift, he argued, would neutralise any fiscal gain, making the supposed savings to the taxpayer “illusory”.

A spokesman for the Bank said: “The governor set out the Bank’s views on this matter to the Treasury Select Committee.” Bailey maintained that paying full interest incentivises banks to keep reserves with the central bank, which provides important financial stability benefits.

The UK’s current system, introduced in 2006, differs from those of some other central banks. For example, the European Central Bank (ECB) operates a tiered reserve structure, in which lenders earn no interest on their minimum required reserves. Advocates for reform, including some in Westminster, argue that adopting a similar model in Britain could help ease the fiscal burden without endangering stability.

However, the UK’s banking industry has pushed back strongly. UK Finance, the trade association for banks, said any changes to reserve remuneration “would have real consequences for the UK economy and likely lead to consumers and businesses facing higher banking costs”.

Meanwhile, former Bank policymaker Gertjan Vlieghe has warned that failing to pay interest in full could be viewed as tantamount to a debt default, undermining confidence in Britain’s financial institutions.

Though politically eye-catching, Reform’s proposals highlight the delicate balancing act facing the Bank of England — navigating financial stability, inflation control, and government borrowing costs, all while resisting political interference. For now, the interest payments continue, but pressure to reform the system looks unlikely to subside.

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Reform UK clashes with Bank of England over interest payments to lenders

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