Professor Charles Goodhart has advocated charging banks for holding reserves at the Bank of England to encourage them to lend out the cash created by quantitative easing. He cites the example of Sweden, where the interest rate on the Riksbank's deposit facility has been set at minus 0.25%.

Current Swedish monetary policy and money market arrangements, however, are not comparable with the UK's. The Riksbank has cut its target interest rate, the repo rate, to 0.25% but has not engaged in quantitative easing, in the sense of asset purchases financed by creating new reserves. The deposit rate has fallen to -0.25% because it has recently been set 50 basis points below the repo rate.

Swedish banks make little use of the deposit facility because they are able to lend to the Riksbank in daily "fine-tuning" operations at the repo rate minus 10 basis points – i.e. 0.15% at present. The Riksbank's weekly statement shows that these fine-tuning loans currently stand at SEK176 billion versus deposits of only SEK39 million. So the negative deposit rate has little practical relevance.

In the UK, a key objective of market operations is to maintain overnight interest rates in line with Bank rate. If the Bank of England stopped paying interest on reserves, banks would attempt to earn a return on their cash by lending it out short term in secured money markets; this increased supply would push overnight rates close to zero. In other words, the change would undermine the anchor role of Bank rate and, by extension, the MPC's control over monetary conditions.

On the same logic, if the Bank charged banks for holding reserves, overnight rates would turn negative. Banks would then have an incentive to hold liquidity in the form of bank notes, which would at least maintain a fixed value, rather than deposits at the central bank or overnight loans. To prevent such behaviour, the Bank would have to place restrictions on banks' ability to convert their reserve holdings into bank notes – another fundamental feature of current monetary arrangements.

Paradoxically, banks as a group would be unable to avoid charges even if they increased their lending as desired, since the aggregate amount of reserves would be unaffected. While an individual bank might succeed in reducing its deposits, other institutions would find themselves holding more cash. The aggregate level of reserves is effectively fixed by the Bank of England, assuming a stable demand for bank notes.

Recent lending stagnation has been partly due to a fall in credit demand. To the extent that supply of loans is constrained, this reflects banks' efforts to conserve capital and reduce risk, rather than the competing attraction of earning 0.5% by holding cash at the Bank of England. Even if the technical obstacles could be overcome, a reserves-charging scheme would probably have little impact on lending behaviour.