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Treasury Gets £35bn Windfall From QE Interest

(c) Sky News 2012

The Treasury is to receive a £35bn boost as part of a deal with the Bank of England that will effectively reduce public debt.

Chancellor George Osborne and Bank Governor Sir Mervyn King have agreed that the BoE will give the Treasury interest earned through its £375bn economy-boosting programme known as quantitative easing (QE).

The cash - currently on the BoE's books - will flatter the public accounts by reducing the budget deficit, while also acting as a "small loosening of monetary conditions" equivalent to taking more QE action, according to the Bank.

The announcement comes a day after it decided not to extend QE at its monthly policy-setting meeting.

The Treasury said the agreement was in line with similar practices surrounding QE in the United States and Japan (EUREX: FMJP.EX - news) .

In a letter to Mr Osborne, Sir Mervyn stressed the cash transferred to the Government would likely need to be paid back to the Bank in the future.

The move comes at an apt time for Mr Osborne as he faces pressure on his plans to cut borrowing.

But JP Morgan Chase economist Malcolm Barr said it was "still likely" that the Chancellor will need to push back debt reduction targets in his upcoming autumn statement.

Shadow chief secretary to the Treasury Rachel Reeves said it was a "smoke and mirrors" deal.

"Instead of changing course and taking action to create the jobs and growth we need to get the deficit down. The Chancellor seems to think he can just be bailed out in the short term by money from the Bank of England," she added.

Under the arrangement, £11bn is expected to be handed to the Treasury this year, with the remaining £24bn paid in four instalments over the next financial year.