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UK should consider interest cut on banks' BoE reserves - former deputy governor

FILE PHOTO: Bank of England rises intrest rate to 1.75% as inflation hits 13%

LONDON (Reuters) - Britain should consider changing the Bank of England's policy of paying interest to banks on the reserves they hold there, former BoE deputy governor Charlie Bean said on Tuesday.

Bean's comments follow a proposal from another ex-BoE deputy governor, Paul Tucker, who said the government could save 30-45 billion pounds ($34-$52 billion) a year by moving to a system where banks would receive interest on a fraction of their deposits at the BoE.

British banks hold around 950 billion pounds of reserves at the BoE, largely as a result of more than 800 billion pounds of reserves created to pay for quantitative easing bond purchases that the central bank is yet to reverse.

Banks are paid interest on the reserves at whatever is the BoE's current interest rate - just 0.1% a year ago, but 2.25% now and set to rise further.

Until recently, the government received profits made by the BoE's bond purchase programme when interest rates were low.

Those flows have reversed: now the government foots the bill for any losses the BoE makes as it pays higher interest on bank reserves issued for its QE programme.

With public finances under growing strain from energy bill support schemes and a stalling economy, the cost of this liability has come under increasing scrutiny.

"I think it's one of the extra things to throw into the mix," Bean said of changing the policy on paying interest on reserves, at a Resolution Foundation think tank event.

BoE Governor Andrew Bailey has said the current system is essential to transmit changes in the BoE's official interest rate through to the wider economy.

However Tucker, who was deputy governor from 2009 to 2013 and is now a researcher at Harvard University, said similar effects could be achieved by paying interest on just 100 billion pounds of reserves.

Bean said a move to pay interest on only a fraction of the reserves was effectively a fiscal weapon, because it took revenue away from banks.

"My guess is that if the Treasury were minded to go down this route, they would rather do it in the form of a bank tax," Bean said.

(Reporting by Andy Bruce; Editing by Alexandra Hudson)