Tame Inflation Without Subsidizing Banks
When central banks raise interest rates, they also raise the cost of payments on commercial banks’ excess reserves. The best way to avoid a windfall for bankers – and a burden for taxpayers – is to shrink the central bank’s balance sheet by selling government bonds while implementing a temporary increase in minimum reserve requirements.
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LONDON – In an effort to tackle inflation woes, major central banks have been raising interest rates aggressively. But a byproduct of the recent rate hikes is higher interest payments on central-bank deposits held by commercial banks – in effect, a transfer of public-sector money to private banks.