Reform launches attack on the Bank of England

Telegraph

5 hours ago

Reform has launched a blistering attack on the Bank of England for wasting tens of billions of taxpayers' cash on its money-printing programme.
Richard Tice, the party's deputy leader, accused Threadneedle Street of prioritising bank profits over the interests of working people as he vowed to order it to stop paying billions of pounds in interest to commercial lenders.
In a letter to Andrew Bailey, the Governor of the Bank of England, Mr Tice says the Bank has engaged in 'systemic misuse of taxpayers' money' by paying interest on cash parked at the Bank as well as selling its existing stockpile of government bonds at substantial losses.
Reform, which is leading several polls, claims it could save £35bn a year by scrapping interest on central bank reserves, created as part of the Bank's £895bn quantitative easing (QE) programme to boost the economy during the financial crisis and Covid lockdowns.
It wants to use this money to help pay for an increase in the tax-free personal allowance to £20,000 and cut corporation tax.
Mr Tice said the unwinding of this programme – known as quantitative tightening (QT) – was pushing up borrowing costs and piling pressure on the public finances.
'The Bank of England is unnecessarily wasting tens of billions of pounds of taxpayers' money, whilst enriching City institutions,' the letter says.
'The nation's accounts are already under very severe pressure. QT is also partly responsible for keeping gilt yields higher than they otherwise would be, resulting in even more punitive interest costs, imposing yet more strain on the [public finances].'
The remarks put the Bank on a collision course with Reform if the party wins the next election. Mr Bailey has warned that a victory for Reform could lower savings rates or push up borrowing costs for consumers.
Commercial banks earn interest on reserves held at the Bank at the base rate. Threadneedle Street made huge profits from QE when interest rates were at record lows of 0.1pc because the returns on the government gilts it bought were far higher than the amount it had to pay in interest on reserves.
A total of £123.9bn was generated and sent to the Treasury. However, this rapidly reversed when borrowing costs started to rise, with £85.9bn transferred back from the Treasury to the Bank since the end of 2022.
NatWest, Barclays, Lloyds and Santander received more than £9bn in interest on Bank of England reserves in 2023 – a 135pc increase on the previous year, according to the Treasury committee of MPs.
The Office for Budget Responsibility (OBR), the Government's tax and spending watchdog, expects the cumulative lifetime loss to the taxpayer to total £133.7bn – which is bigger than the annual education budget and more than twice what the UK spends on defence.
Reform is not alone in its criticism of QT. Former Bank deputy governors including Sir Paul Tucker and Sir Charlie Bean have also suggested changes to how reserves are remunerated.
Rachel Reeves, the Chancellor, also wrote to Mr Bailey last month to stress that the process of reducing the Bank's stockpile of bonds must provide 'value for money'.
However, the Governor has repeatedly warned that ending interest payments on reserves could undermine the Bank's ability to influence the cost of borrowing, while another former policymaker, Gertjan Vlieghe, said such a move would be a 'disaster' akin to a debt default.
Mr Tice used the letter to describe the comparison as 'complete nonsense'.
He said: '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.
'It did not belong to those City institutions in the first place. It is no coincidence that commercial bank profits have soared as interest rates rose as the Bank of England paid out tens of billions of this voluntary interest. Those institutions cannot believe their luck.'
Catherine Mann, a member of the Bank's Monetary Policy Committee (MPC) that sets interest rates, has also warned that policymakers must pay closer attention to the impact of QT on financial markets and the wider economy now that it is cutting interest rates. She estimated that QT could raise borrowing costs by almost a quarter of a percentage point.
Mr Bailey 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 at the Bank.
In a letter to the Treasury select committee in April, Mr Bailey said: 'Remuneration of reserves is a key component of the Bank's approach to ensuring rate control. Any loss of rate control would undermine the MPC's ability to affect the real economy with its interest rate decisions and could cause significant harm to credibility of monetary policy.'
However, Mr Tice denied that Reform would be interfering with the Bank's independence, comparing the Bank's choices to 'extraordinary strategic decisions which amount not to monetary policy but to fiscal policy, costing the taxpayer tens of billions of pounds of losses'.
He added: 'The role of elected governments and politicians is to protect taxpayer's money and the broader interests of the electorate. It would be negligent of us to ignore this very significant issue and leave it in the hands of unelected people. Our job is to challenge, scrutinise and question'.
A Bank of England spokesman said: 'The Governor set out the Bank's views on the matter in a letter to the Treasury Select Committee.'