Being driven down to zero I think means people would lend at 0% interest - I would think thousands of years of anecdotal evidence would speak to the contrary - how would it ever get to zero? Who would lend like that? What would their motivation be?
"Being driven down to zero I think means people would lend at 0% interest "
Banks can't get rid of reserves at the central bank in aggregate. They can only get rid of them to other banks. So there is no need for the central bank to pay them.
You can't hold reserves so the bank can charge you for borrowing money.
Since there are more reserves than required, and no alternative source of interest, the inter bank rate would be driven to zero.
How do you think central bank rates bind? It gives banks an alternative source of interest other than lending them to each other.
I keep these bookmarked as they're about the simplest and clearest introductions to how economies work that I've found - and the Bank of England should know what they're talking about :)
Bank reserves aren't an important factor in the financial systems, they're there to ensure customers have access to money if they want to withdraw it and to allow banks to move money between each other. More importantly banks don't lend money out of their reserves (so-called "fractional reserve banking"), they simply add the loan amount to the customer's account and also to their own liabilities i.e. they "create" money.
