At the heart of the row is the interest paid on nearly £700 billion in reserves held by commercial lenders at the Bank of England—a by-product of the QE programme that ran from 2009 to 2021. Under QE, the Bank purchased £895 billion in government bonds, injecting cash into the financial system. That money was then parked by the banks at the central bank, earning interest pegged to the base rate, currently 4.25 per cent.
This arrangement proved profitable for both parties when rates were low. But the rising cost of borrowing has flipped the calculus. Since late 2022, the Treasury has had to reimburse the Bank for mounting losses, reversing earlier windfalls. More than £85 billion has already been transferred back to the Bank, according to figures from the Office for Budget Responsibility (OBR), with the eventual taxpayer loss projected to reach £133.7 billion.
“This money was created out of thin air by the Treasury and Bank of England to lubricate the wheels of the economy at two times of extreme national stress over the last 18 years,” Tice wrote. “It did not belong to those City institutions in the first place.”
The Bank, however, has pushed back strongly. Bailey has previously told Parliament that paying interest on reserves is a central tool for maintaining control over interest rates. Removing or reducing these payments, he argued, could drive banks to move their funds into government bonds, undermining monetary policy.
“There would be no fiscal saving,” he warned. “Any presumed benefit to the public purse from reducing interest payments in this way would … be illusory.”