Pressure mounts on the Chancellor due to today's Quantitative Tightening decision
The Bank of England, like the European Central Bank and the Federal Reserve, is currently responsible for absorbing its own losses. However, a growing chorus of voices, including economist Dominic Caddick of the New Economics Foundation, is urging a change in this policy.
The suggestion is to slow quantitative tightening, a process that eases pressure in bond markets. This move would also prolong the interest paid out on the central bank money created to buy bonds.
Currently, the Bank of England has a policy of covering losses with Treasury money. This subsidy, it is argued, is a massive one, effectively paying a subsidy to the banking sector. The interest paid out on the central bank money currently outstrips the interest the Bank receives from those bonds.
The chancellor could eliminate a headache by scrapping the Osborne-era policy of covering Bank of England losses with Treasury money. One possible solution could be for the Bank to reduce this subsidy by choosing to pay zero interest on some reserves, a practice adopted by Switzerland and the Eurozone.
Another option could be for the chancellor to tax commercial banks to reclaim some of their windfall. This move could help balance the books and ensure a more equitable distribution of financial burden.
In conclusion, the call for the Bank of England to absorb its own losses and end the subsidy to banks is gaining traction. The potential benefits of slowing quantitative tightening and adopting practices like paying zero interest on reserves could lead to a more sustainable financial system for all.
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