In the US, the Federal Reserve (Fed) recently voted to raise the interest rate paid on reserve balances to 4.65%. That means it will owe US$140 billion ($188.2 billion) in interest payments on roughly US$3 trillion of bank reserves this year. The Bank of England is also on the hook for similarly massive handouts to commercial banks.
Major central banks have been raising interest rates aggressively to tackle inflation woes. But a byproduct of the recent rate hikes is higher interest payments on central-bank deposits held by commercial banks – a transfer of public-sector money to private banks.
The Eurosystem – comprising the eurozone’s 20 national central banks and the European Central Bank (ECB) – will pay EUR107 billion ($153.2 billion) in interest (on EUR4.3 trillion of deposits) to financial institutions during 2023. As promised, that number will increase to EUR129 billion when the ECB raises its deposit rate to 3% in March.
