Reform plans risk destabilising markets, warns Bank of England

Telegraph

2 days ago

Reform's plan to overhaul the Bank of England will leave markets more exposed to financial shocks, a senior official at the central bank has suggested.
Victoria Saporta, a director at the Bank, signalled that the party's scheme to stop the Bank paying interest on money held there by commercial banks could return Britain to a world of 'significant' volatility in financial markets.
It comes amid increasing scrutiny of Reform's economic plans as the party surges in popularity.
Panmure Liberum recently warned of an 'immediate and violent' sterling crisis if Nigel Farage came to power and followed through on his plans to slash taxes. Reform has refuted this claim, saying it would focus on cutting spending first to ensure any tax cuts were affordable.
The party has vowed to save taxpayers up to £35bn a year by scrapping interest payments on central bank reserves, which were created as part of the Bank's £895bn quantitative easing (QE) programme to boost the economy during the financial crisis and Covid lockdowns.
Richard Tice, the party's deputy leader, sent a letter last week to Andrew Bailey, the Governor of the Bank of England, accusing Threadneedle Street of prioritising corporate profits over the interests of working people.
He claimed the Bank was engaging in a 'systemic misuse of taxpayers' money' by paying interest and selling its existing stockpile of government bonds at substantial losses.Threadneedle Street did not start paying interest on reserves until 2006.
While Ms Saporta did not reference Reform's plan directly in her comments, she warned that the pre-2006 system 'actively disincentivised banks from holding any more reserves than was strictly necessary' because they were not remunerated.
She added: 'This complex, scarce-reserves framework came at the cost of significant overnight rate volatility.'
Ms Saporta added that paying interest on money parked at the Bank underpinned its ability to influence the economy by controlling borrowing costs. Mr Bailey has previously said that stopping interest payments on reserves would undermine this power.
The Governor has repeatedly spoken out against changing the way commercial lenders are compensated for parking their cash at the Bank, warning that it could undermine financial and monetary stability if lenders no longer wished to hold extra buffers.
Ms Saporta said: 'By remunerating reserves at Bank Rate, we anchored short-term market rates to the Monetary Policy Committee's chosen policy rate – a core feature of the framework that remains in place today.
'Put simply, we implement monetary policy through the interest we pay on reserves, and this has delivered a significant improvement in our ability to steer market rates.'
Responding to Ms Saporta's comments, Mr Tice said: 'This speech is designed to confuse people with technical detail. It avoids the basic principle that the system worked fine [pre-crisis], before QE, and ignores the fact that some other central banks are neither paying interest on QE reserves nor doing quantitative tightening.'
Quantitative tightening is the term for winding down the significant holdings of bonds built up by the bank throughout successive crises. Critics, including Mr Tice, believe offloading bonds is detrimental to the UK as it is crystallising losses for the taxpayer and pushes up borrowing costs.
The Bank is selling down its stockpile of bonds at heavy losses to the taxpayer.
The Office for Budget Responsibility (OBR), the Government's tax and spending watchdog, expects the cumulative lifetime loss to total £133.7bn, which is bigger than the annual education budget and more than twice what the UK spends on defence.
Ms Saporta signalled that it will keep running down its stockpile of government bonds. She said the Bank will continue to move to a more normalised system of providing cash on demand through what's known as repurchase or 'repo' operations.