This is an In Discussion working paper (July 2026), tracking a live political proposal rather than presenting a settled position. The institutional history in Section 1 is well established across multiple independent sources and can be treated as solid. The costed figures in Sections 2–3 are as reported in press coverage from January to October 2026, and the headline £35bn-versus-£11.5bn gap is explicitly unresolved — see the note at the end before treating either number as final.
1. Why Bank of England Independence Matters
On 6 May 1997, four days after the general election, the incoming government gave the Bank of England operational independence over interest rates.1 It was a bundled, secretive decision — no manifesto commitment preceded it, reportedly for fear the opposition would claim it meant rate rises — and it was not full independence. The inflation target is still set by the Chancellor; the Bank's job is to hit it, via the newly created Monetary Policy Committee, and explain itself to Parliament if it misses by more than a percentage point either way. Government keeps the goal. The Bank gets the tool.1
The case for that split rests on what came before it. Pre-1997, interest rates were a Chancellor's decision, and were repeatedly used for short-term political ends — most visibly in the late-1980s Lawson Boom, when low rates and credit deregulation drove a housing and consumption boom ahead of the 1987 election, followed by a sharp bust into 1990–92.1 That instability fed directly into Black Wednesday on 16 September 1992: the UK, committed to holding sterling within a band against the Deutschmark under the Exchange Rate Mechanism while running inflation roughly three times Germany's, raised rates from 10% to 12% and announced a further rise to 15% in a single afternoon — a rate that never took effect before the UK abandoned the peg and let sterling float.1 The immediate effect was a reputational catastrophe for the government of the day. The medium-term effect, once free of the ERM, is widely regarded as positive: rates fell to 7%, the currency devalued, and the combination is credited with supporting the 1993–94 recovery. The throughline from that crisis to 1997 is direct — within weeks of Black Wednesday, the Bank was given formal responsibility for targeting inflation, though government still set rates, and five years later it was given the rate-setting tool as well, aligning the UK with the Bundesbank and Federal Reserve model.1
The San Francisco Federal Reserve's own contemporary analysis, published within months of the 1997 announcement, found the change moved market expectations of future UK inflation — a live measurement of the credibility effect independence was designed to produce.2 It is worth holding two further points together. First, independence advocates have themselves criticised specific Bank decisions since 1997 — Gordon Brown among them, over the Bank's 2007–08 crisis response — without concluding the institutional design should change; critiquing a decision is not the same as attacking the mechanism that produced it. Second, independence has evolved since 1997, not stayed frozen at the original design — the 2013 Financial Services Act created the Financial Policy Committee and a macroprudential remit the original settlement did not include.
2. The Mechanism — How QE Created This Bill
Between 2009 and 2021, the Bank of England ran quantitative easing, buying roughly £895bn of government bonds from commercial banks.3 Payment for those bonds was not cash but a credit to the selling bank's reserve account at the Bank — an electronic balance, not physical money. The Bank pays interest on those reserves at Bank Rate, and this is not a subsidy in origin: it is the mechanism by which Bank Rate is transmitted into the wider economy at all. If reserves earned nothing, commercial banks would lend them out below Bank Rate, and the Bank would lose control of the rate it is trying to set.4
The reason the cost has become politically salient is straightforward. During QE itself, Bank Rate sat near zero, so the interest bill on hundreds of billions of pounds of reserves was trivial. The rate rises since 2022, peaking above 5%, turned a near-costless mechanism into a multi-billion-pound annual liability — and because any losses on the Bank's QE operations are indemnified by HM Treasury, this is a real fiscal flow, not an internal Bank balance-sheet abstraction.4
3. The Proposal — What Would Change
One proposal now circulating in UK political debate is to stop interest payments on QE-created reserves entirely, claimed to save £35bn a year — first set out in 2024 and reaffirmed in January 2026.35 It is explicitly framed as distinct from a bank tax: the argument is that this is income banks never earned rather than money being taken from them. Its backers claim support from figures at the Financial Times, the New Economics Foundation, the IFS, and two former Bank of England deputy governors — a claim this pillar has not been able to independently confirm as to which individuals, or in what form.
The £35bn figure itself is contested. An independent fact-check found a more defensible estimate closer to £11.5bn, with the gap depending heavily on which reserves would be exempted and how any tiered system would be structured.6 The reserve-interest proposal also sits inside a wider pattern of political pressure on the Bank, which separately includes pushing to halt quantitative tightening — the Bank's bond-selling programme — on cost grounds, and to stop the digital pound project.7
4. International Comparison
Tiered remuneration of reserves — paying interest on only part of a bank's reserve holdings rather than all of it — is used by the European Central Bank and others, and represents a materially more moderate version of this idea than the "stop it entirely" proposal above.4 This pillar has not yet done the work needed to cite current ECB tiering mechanics or rates with confidence, or to establish comparable treatment at the Federal Reserve or Bank of Japan — that research is still open, and no specific international figures are asserted here until it is done.
5. Steel Man — The Case for Reform
The strongest version of the case for change does not rest on "free money" rhetoric. Commercial banks did not choose to hold these reserves for yield — they are the mechanical by-product of the Bank buying bonds from them under QE, which some economists reasonably characterise as a windfall rather than an earned commercial return. Tiering, in particular, is not a fringe idea: it is a real, less disruptive policy already in use elsewhere, meaning the debate does not have to be binary between paying Bank Rate on every reserve and paying nothing at all. And the scale of the transfer — genuinely tens of billions of pounds cumulatively since rates rose — is large enough that even a partial, tiered reform would be fiscally material against other revenue and spending proposals under consideration elsewhere on this site.
6. The Case Against
The Bank's own objection, articulated by Governor Andrew Bailey, is not institutional defensiveness: paying nothing on reserves risks breaking the mechanism that holds market interest rates at Bank Rate in the first place, which is the entire point of the tool.4 A second risk is that the saving does not disappear so much as relocate — commercial banks facing lost income on reserves have an obvious route to recoup it through worse savings rates, pricier lending, or higher fees, the same pattern seen when a cost is removed from one balance sheet without addressing the underlying exploit rather than just moving who bears it.
A third risk is specific to how markets read institutional independence. Opponents of the proposal — among them other political parties and market commentators — frame it as an erosion of Bank independence in substance, whatever it is called. A note from Rabobank flagged that if markets price a reserve-interest reform as a credibility risk to that independence, the result could show up as steeper gilt yield curves, a discount on sterling, and weaker performance in rate-sensitive equities — meaning a fiscal saving on one line could be partially offset by a higher cost of government borrowing elsewhere.8 The 2022 mini-budget market reaction is the precedent proponents themselves invoke, arguing any market-unsettling reform needs to be paired with credible fiscal discipline around it — which raises a genuine, not yet resolved, question of whether reserve-interest reform alone would trigger a similar market reaction independent of whatever spending package surrounded it.
7. Two Reform Shapes, Not Yet Resolved
A. Full stop — the proposal as currently framed. Stop paying interest on QE reserves entirely. Maximum claimed saving (a contested £11.5bn to £35bn), and maximum risk to rate transmission and Bank credibility.
B. Tiering — an ECB-style partial reform. Pay Bank Rate on only a portion of reserves. A smaller, more defensible saving; preserves rate transmission on a working tranche of reserves; harder to characterise as ending central bank independence; more international precedent behind it.
Which reserves would be exempted under a UK tiering scheme, and what saving that would actually produce, is not resourced yet — the £35bn and £11.5bn figures both belong to the "full stop" framing and should not be borrowed as a proxy for what a tiered alternative would save.
8. What This Connects To
The fiscal saving claimed for this proposal, whichever figure turns out to be defensible, needs to sit alongside this site's other revenue-side proposals — the Two-Jar Fiscal Framework and the Revenue Architecture pillar among them — so the aggregate fiscal picture doesn't double-count a contested saving that may not fully materialise. Section 1's institutional history is also the cleanest case study on this site of insulating a technical function from short-term political incentive, directly relevant to the Public Office Covenant's wider argument for independent institutions — comparable in spirit to judicial independence or the independence of the Office for National Statistics.
Sourcing note: the 1997/1992 independence history in Section 1 draws on the Bank of England's own retrospectives and the San Francisco Fed's contemporary 1997 analysis, and is treated as solid. The QE and reserve-interest figures in Sections 2–3 reflect press reporting current as of January–October 2026. The £35bn-versus-£11.5bn discrepancy should be resolved against a primary source — the Bank's own annual report or an OBR costing — before this note is promoted out of "in discussion" status.
For public discussion. Not affiliated with any political party. | generationalreset.org
The Generational Reset | In Discussion: BoE Reserve Interest | For public discussion. Not affiliated with any political party. | generationalreset.org