Have UK banks gone from being beneficiaries of quantitative easing to potential scapegoats for its costs? This question underpinned a £6.4 billion market rout on Friday, as a shifting narrative around the policy’s legacy put the financial sector on the defensive.
For years, the interest earned on QE reserves was an accepted part of the monetary landscape. However, a new report from the IPPR has successfully reframed this as a £22 billion annual “windfall,” transforming the banks from passive participants in a system to active beneficiaries of a public loss.
This change in narrative immediately made the banks vulnerable, suggesting they could be made the scapegoats to pay for this fiscal problem. The market reacted to this new political risk by selling off shares in NatWest, Lloyds, and Barclays, fearing that this narrative would lead to punitive action.
The danger for the banks is that the “scapegoat” narrative is politically convenient for a government that needs to explain a £40 billion budget hole. The £6.4 billion question for investors is whether the government will embrace this narrative or defend the current system as a necessary, if costly, feature of modern monetary policy.
