Banks breathed a sigh of relief after Rachel Reeves appeared to rule out overhauling the way lenders receive interest at the Bank of England.
Shares in the UK’s high street lenders were among the biggest risers in a wider market rally on Wednesday. Lloyds rose 2.1 per cent while Natwest climbed 1.8 per cent. HSBC gained 1.6 per cent.
The market moves came after Reeves, the shadow Chancellor, said she had “no plans” to change the way interest is paid on the roughly £770bn of commercial bank deposits held by high street lenders at the Bank of England.
“The paying of interest on reserves is part of the transmission mechanism for monetary policy; it’s one of the ways that higher interest rates filter through to the real economy,” she added.
The financial system was flooded with new reserves during the Bank of England’s various rounds of quantitative easing. The Bank of England pays interest on these reserves, ultimately funded by the taxpayer.
As interest rates have increased over the past two years, high street lenders have seen increased revenue from holding money at the Bank. According to the Treasury Committee, Natwest, Barclays, Lloyds and Santander earned a combined £9bn in interest from the Bank of England.
Figures from across the political spectrum, including Gordon Brown and Reform UK, have suggested that the Treasury could save billions by paying zero interest on at least a portion of these reserves.
“I don’t think that would be without its dangers,” Reeves said.
Andrew Bailey has also consistently spoken against the idea, describing it as a tax on banking. He said it would require a fundamental rethink of how monetary policy works.
“Paying Bank Rate on reserves anchors the implementation of monetary policy,” Bailey told the House of Lords in February.
Reeves’ comments were met with approval in the industry. One source in the banking industry said tiering reserves would have had “adverse consequences for the competitiveness of the financial sector when supporting growth is the real priority”.
Jonathan Pierce, an analyst at Deutsche Numis, said Reeves’ announcement was “good news” for banks and should allow investors to focus on an improving financial performance in the autumn.
However, he warned that this might not be the end of the story. “None of this means the issue has completely gone away,” Pierce said. “Reserve tiering or higher direct taxation of banks may eventually prove too appealing for a future Government facing difficult fiscal decisions.”