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UK govt to earn $A54bn interest on debt

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November 10 2012, 05:45AM

The British government says it will receive about STG35 billion ($A54 billion) in interest earned on state debt purchased under the Bank of England's quantitative easing (QE) stimulus policy.

Chancellor George Osborne and BoE governor Mervyn King have agreed that the central bank will give the Treasury all interest earned on government debt owned under its STG375-billion asset purchasing scheme.

Under QE, the Bank of England creates new money that is used to purchase assets such as government and corporate bonds with the aim of boosting economic activity.

"The government (has) agreed with the Bank of England to transfer to the Exchequer the excess cash held in the bank's Quantitative Easing facility," the Treasury said in a statement on Friday.

"This will align the cash management arrangements for the facility with normal government practice and with the approach followed by other countries undertaking QE."

The Treasury said the BoE's Asset Purchase Facility (APF) - which holds funds used to carry out QE asset purchases - was expected to increase to around STG35 billion by the end of March next year.

"Cash transferred from the APF to the Exchequer will be used to benefit the public finances and to reduce debt," it said.

However, in a letter to Osborne, BoE governor King stressed that the cash transferred to the government would likely need to be paid back to the bank at some stage in the future.

The announcement came one day after the BoE decided against injecting more QE stimulus into the economy and voted to hold interest rates at a record low, after Britain escaped from recession in the third quarter of 2012.

The central bank said on Thursday its nine-member monetary policy committee (MPC) voted to hold rates at 0.50 per cent and leave its QE stimulus amount at STG375 billion.

The decision means the radical QE policy is effectively on pause after the most recent 50-billion tranche of new money was completed.