Paul Tucker, a former deputy governor of the Bank, argued in an influential 2022 paper that the scale of the payments caused by QE was so large that it disrupted the financing of the Government.
But there is no such a thing as a free lunch and there are reasons to fear that reducing payments to banks could backfire.
Perhaps the most worrying for mortgage-holders is the fact that banks would be unlikely to take the hit lying down.
Lenders would likely try to recoup the lost interest revenue elsewhere, either from paying less to savers or by raising the rates they charge to borrowers.
Jack Meaning, a former Bank of England economist now at Barclays, says different options available could save the Government, and cost the banks, between £1bn and £11bn a year.
To claw £11bn back, banks could add as much as half a percentage point to their mortgage rates.
Figures from industry group UK Finance indicate this would cost a typical fixed-rate mortgage borrower just over £68 extra per month, or £820 per year.
One banking source said any such raid on the interest paid to banks would therefore amount to a stealth “mortgage tax”.
There are other reasons to be wary of shaking up the way the Bank pays interest. Reeves herself gave one last week: “The paying of interest on reserves is part of the transmission mechanism for monetary policy – it is one of the ways that higher interest rates filter through to the real economy, so I don’t think that would be without its dangers.”
Andrew Bailey, the Bank’s Governor, last month defended the interest payments as “an essential anchor for the implementation of monetary policy”. Removing it could undermine the way the Bank seeks to influence the economy.
Swiping the cash could also undermine other parts of the financial system, and potentially any future use of QE in another crisis.
Stephen Millard, previously a Bank of England economist and now at the National Institute of Economic and Social Research, says it would be “really pernicious” to change the rules of the game.
“The result of QE is that banks are effectively forced to hold very large amounts of reserves that they otherwise wouldn’t be holding. It was almost a quid pro quo that because we are forcing you to hold these reserves, we are going to remunerate them,” he says.
Banks’ share prices also risk being hammered by the loss of billions in revenue.
This might not distress the average Labour voter but there would be a knock-on effect for the taxpayer, which still owns more than one-fifth of NatWest.
Jung at the IPPR argues that these pitfalls are “eminently manageable.” He believes that banks would be unlikely to raise mortgage rates in response to any changes because their profits are already high thanks to interest rates and many would fear losing market share.
Still, any calculation of this sort is essentially a game of chicken with commercial banks – one that politicians would be loath to lose.
For now, Reeves insists that Labour has no plans to fiddle with the Bank of England’s system. But with money tight and billions potentially up for grabs, many in the City fear a stealth “mortgage tax” will be back on the table before long if Labour wins power.