"The basis of our regime is reserves remuneration," Andrew Hauser, the BoE's executive director for markets, told a central banking conference hosted by King's College London on Friday.
"If we didn't remunerate reserves, (market interest) rates would fall below the Bank Rate. And at a time when we're trying to bring inflation down, that would be uncomfortable."
European Central Bank policymakers are reviewing the interest the ECB pays on government cash deposits, including a potential cut, to try and rein in mounting losses resulting from its fight against inflation, two sources told Reuters this week.
British Prime Minister Rishi Sunak said in 2021, when he was finance minister, that changes to remuneration of cash reserves held by banks at the BoE would hurt the BoE's effectiveness. He has promised voters to halve inflation this year.
But speculation about possible changes has persisted given the potential savings for the government of tens of billions of pounds if banks received interest on only a fraction of their deposits at the BoE.
British banks hold around 800 billion pounds of reserves at the BoE, largely as a result of the central bank's quantitative easing bond purchases that it is now reversing.
Banks are paid interest on the reserves at the BoE's prevailing benchmark interest rate - which was just 0.1% a year in late 2021 but now stands at 5.25%.
(Reporting by David MillikenEditing by William Schomberg)
