A central bank should not conduct monetary policy in a way that costs the state enormous sums of money, unnecessarily. Chris Giles made that point when proposing that the Bank of England should cease to pay interest on all of the deposits commercial banks hold with it (“A needless banking subsidy whose time is up”, Opinion, June 7).
Paying interest on those deposits was an efficient way of influencing interest rates when the deposits were small. Quantitative easing made it inordinately expensive. By buying government bonds, the BoE generated nearly £900bn of such deposits and some £700bn are still in existence. The commercial banks were passive recipients of this cash.
There is no reason other than expediency why they should be paid interest on it. My bank is not “taxing” me when it fails to pay interest on a current account.
But beyond the current situation, the government must ensure that another loss of £100bn or so — the estimated cost of QE — does not recur. It should refuse to indemnify losses the BoE makes on bond dealing. Using bond purchases and sales counter-cyclically is certain to cost money. Other instruments of economic demand management are available.
On the rare occasions when demand stimulus is necessary it should be done by the co-ordination of fiscal and monetary policy, whereby the Bank determines how much of a government deficit it should finance monetarily. QT should stop and QE should never recur.
Gerald Holtham
London SW8, UK
