BETWEEN A ROCK AND A HARD PLACE: THE CASE FOR A TIERED RESERVE MONETARY POLICY FRAMEWORK

the Bank receives is recycled back to the Treasury At present, the Bank influences monetary policy (the sum of interest paid on bonds by the Treasury, by paying out interest on central bank reserves minus the interest paid out by the Bank on the overnight to the banking sector (Section 1.2). [...] In the past, the banking interest rates will mean the Bank needs to pay out sector’s central bank reserves held as deposits at the more interest to the banking sector for holding the Bank generally bore zero net interest – banks were reserves acquired through QE – which reduces the not rewarded for holding reserves.13 Bank’s profit and increases the net interest servicing costs of the consolidated. [...] Throughout the The current aim of the Bank’s monetary policy day, the Bank lent reserves at the official Bank rate mandate is to alter the price of credit to achieve to help ensure banks had enough reserves to meet the government’s target of a low and stable rate their payment obligations. [...] The floor system, suggests that if interest rates would increase above therefore, allowed the Bank to set the interest rate 2% by the end of the year, then the Bank’s APF and change the amount of central bank reserves would start running at a loss (the average interest available to the banking system independently of received from the Treasury on government bonds one another.20 At the same time, t. [...] But when a significant proportion of government debt is held by the Bank, where the 2.1 TIERED RESERVES AT THE EUROPEAN effective interest rate is the policy rate rather than CENTRAL BANK the gilt rate (Section 1.31), the floor system implies In September of 2019, the ECB announced the a significant unintended cost to the government.