Richard Tice of Reform UK recently argued, in a Daily Telegraph article entitled ‘I know a way to avoid tax rises at the next Budget’, that the Bank of England (BoE) should stop paying interest on its funding for its Quantitative Easing (QE) portfolio. This
funding is the amounts that banks, building societies and other financial institutions have on their BoE Reserve Accounts. The proposed change would have no effect on the BoE’s losses on Quantitative Tightening, meaning when they sell off part of the portfolio,
but it would make it easier for the BoE to hold the bonds until maturity.
The proposed change is designed to stop the BoE from making a current loss from holding on to the QE portfolio. The current loss is 2% per annum: the difference between the 2% per annum that the BoE earns on the QE portfolio and the 4% per annum that it
pays for the funding. Given that the portfolio was £590 billion on 17th September 2025, this 2% equates to an annualised loss of £11.8 billion.
Tice’s proposal overlooks that this 2% loss will exist whatever is done: it cannot be eliminated by magic or accounting. Currently the loss is passed on by the BoE to HM Treasury, who accept it on behalf of UK taxpayers. This causes UK businesses and individuals
to eat the loss through higher taxes.
If banks and building societies ceased to receive their 4% on Reserve Account balances, they would worsen their banking conditions towards the self-same UK businesses and individuals. It is a fallacy to imagine that the banks and building societies will
eat the loss themselves rather than passing it along to their customers.
This worsening of banking conditions due to a gross error by a public authority is a form of shadow taxation, created to deal with the shadow debt that the BoE’s losses on QE constitute. That shadow debt amounted to £165.6 billion as per the BoE’s annual
report on its Asset Purchase Facility dated 28th February 2025.
Furthermore, making the loss disappear from the accounts and reports not only of the BoE, but also of HM Treasury, the Office for Budget Responsibility (OBR), and the Office for National Statistics, would enable these authorities to airbrush the issue away,
and deny the culpability of public authorities for it.
Worse still, reallocating the loss away from HM Treasury allows the government, with the support of the OBR, to identify an increase in ‘fiscal headroom’ and to spend even more, whilst at the same time depleting the financial resources of UK businesses and
individuals. This accelerates us along the road to perdition upon which we are already embarked.
Tice’s proposal would destroy the BoE’s ‘transmission mechanism’, just as the Eurosystem’s has been after they did what Tice proposes. This means that central bank decisions cease to impact the wider economy, as it is through the changes in the interest
rate on Reserve Account balances that the Monetary Policy Committee’s alterations of the Bank Rate feed through into the wider economy. It would not then matter whether the Bank Rate was 4%, 0% or 1,000%.
Tice makes no mention of the risk that banks and building societies might reduce their Reserve Account balances to what is mandatory, and withdraw the remainder. That could leave the BoE short of funding for the QE portfolio, in which case HM Treasury might
have to fund the BoE, and by issuing new gilts, raising our national debt from its already parlous level. The effect of that would be to convert a shadow debt into a real debt, something which we really ought not to countenance.
A further unwanted side effect would be to draw attention to how the BoE managed to ‘digitally create central bank reserves’ in order to fund QE in the first place. If the BoE really did ‘create central bank reserves’, it would own them itself, and not owe
them to banks and building societies as a liability. The BoE’s nonsensical explanations might be best left under wraps.
The parallel Tice draws with the Eurosystem – that Eurosystem national central banks do not pay interest on reserves – is particularly inapt. It is not proof of the validity of his argument, but of the disaster that lies at the end of it. The European Central
Bank (ECB) ordered the Eurozone national central banks both to hold on to their QE bonds and to stop paying interest on banks’ reserves. This was driven by political considerations. Losses under either heading would have been reallocated to the ECB, bankrupting
it. That in turn would have precipitated a call for new capital to be paid in by the member states, money they would have had to borrow. That would have pushed even more member states into the EU’s Excessive Deficit Procedure and drawn undue attention to the
volume of the shadow debts lurking in the EU supranational entities.
The price of maintaining the obscurity of those debts is that the ECB’s changes in interest rates have no impact on the wider economy at all, and Eurozone businesses and individuals have experienced a worsening of the terms of business from their banks:
they are eating the loss, as they would in the UK, if Tice’s proposal were to be adopted.
