Interest on central bank reserves is neither a tax nor a market price - OMFIF

The debate over interest paid on central bank reserves often conflates two distinct concepts, according to OMFIF. Reserve interest is a policy tool — a rate set administratively by the central bank — rather than a tax levied on banks or a price discovered in a competitive market. That distinction matters because it shapes how the tool is understood and evaluated.

Because reserve interest is set by policy rather than by market forces, it operates differently from other rates in the financial system. Central banks use it to help steer short-term interest rates and manage liquidity conditions, particularly in systems where reserves are abundant. Treating it as a tax or a market price can lead to mistaken conclusions about who bears its costs and how it transmits through the economy.

For market participants, the practical takeaway is to watch how reserve interest is calibrated alongside other policy settings, and how changes feed into money market rates and bank behaviour. The framing offered by OMFIF is a reminder that the design and communication of these tools matter as much as the level itself.