To fight inflation, central banks have to increase interest rates. Their operating procedure consists of raising the rate of remuneration on commercial banks’ reserves held at the central bank. In doing so, central banks now make large interest payments to banks. The Eurosystem will be paying out €136bn interest on €3.6tn of reserves to euro area banks during 2023 (Figure 1). The US Federal Reserve will be paying out $162bn to banks in the current year – 5.15% on $3.1tn of bank reserves. Similar massive handouts to commercial banks are now organised by the Bank of England. Figure 1. Bank reserves and interest ... (full story)