Box B: Should the Bank of England Adopt Unremunerated Reserve Requirements?

Quantitative Easing (QE) involved central banks making large scale purchases of fixed interest bonds, in exchange for crediting commercial banks' current accounts held at the central bank – "reserves" – with the aim of delivering economic stimulus by expanding the money supply and lowering long-term interest rates. In the United Kingdom, since 98 per cent of the bonds purchased by the Bank of England (BoE) were gilts, and the state-owned BoE pays interest on reserves at the BoE's monetary policy rate, known as "Bank Rate", QE effectively meant the state buying back its own fixed interest debt in return for floating rate state debt, with the market taking the other side of that trade. Naturally, that switch exposed the state to interest rate risk, in terms of the potential for both realised losses, when Bank Rate exceeds the yield locked in by the price paid for the bonds, and mark to market losses on the bonds.