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“It’s something we’re looking at,” King told lawmakers in London today. “Above some certain level, you can change the rate at which reserves are remunerated. This may be a useful supplement, we’ll think about it. But it’s not going to be a major change.”
The Bank of England currently pays financial institutions 0.5 percent to hold reserves at the central bank. While the Bank of England is deliberately boosting their reserves by buying 175 billion pounds ($289 billion) of bonds through so-called quantitative easing, King says he doesn’t want it to go too far.
“As we engage in asset purchases, it automatically raises reserves in the banking system,” he said. “We don’t want reserves to be unnecessarily high, and we have withdrawn other ways to inject reserves.”
The pound dropped after King’s comments, declining 0.8 percent to $1.6485. Sweden’s Riksbank in July reduced its rate on bank deposits to minus 0.25 percent, requiring banks to pay that amount on the money they stash at the central bank.
King said there are some signs that the asset-purchase plan, which started in March, is having some success in boosting money supply in the economy.
Money Supply
“We’re beginning now, after six months, to see some signs of broad money picking up,” King said. “I will be looking for a further pickup in the growth of broad money.”
The asset purchases and record low interest rates may also help the economy grow again after contracting for a fifth quarter in the three months through June.
“There are now signs that growth has resumed in the third quarter,” King said. “Inflation over the next year is likely to be volatile. But looking further ahead, the strength and sustainability of the recovery is highly uncertain and the balance of risks to inflation around the 2 percent target remains on the downside.”
The inflation rate dropped to 1.6 percent in August, the statistics office reported today.
“It’s something we’re looking at,” King told lawmakers in London today. “Above some certain level, you can change the rate at which reserves are remunerated. This may be a useful supplement, we’ll think about it. But it’s not going to be a major change.”
The Bank of England currently pays financial institutions 0.5 percent to hold reserves at the central bank. While the Bank of England is deliberately boosting their reserves by buying 175 billion pounds ($289 billion) of bonds through so-called quantitative easing, King says he doesn’t want it to go too far.
“As we engage in asset purchases, it automatically raises reserves in the banking system,” he said. “We don’t want reserves to be unnecessarily high, and we have withdrawn other ways to inject reserves.”
The pound dropped after King’s comments, declining 0.8 percent to $1.6485. Sweden’s Riksbank in July reduced its rate on bank deposits to minus 0.25 percent, requiring banks to pay that amount on the money they stash at the central bank.
King said there are some signs that the asset-purchase plan, which started in March, is having some success in boosting money supply in the economy.
Money Supply
“We’re beginning now, after six months, to see some signs of broad money picking up,” King said. “I will be looking for a further pickup in the growth of broad money.”
The asset purchases and record low interest rates may also help the economy grow again after contracting for a fifth quarter in the three months through June.
“There are now signs that growth has resumed in the third quarter,” King said. “Inflation over the next year is likely to be volatile. But looking further ahead, the strength and sustainability of the recovery is highly uncertain and the balance of risks to inflation around the 2 percent target remains on the downside.”
The inflation rate dropped to 1.6 percent in August, the statistics office reported today.
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