Chancellor George Osborne and Bank Governor Sir Mervyn King have agreed that the Bank will give the Treasury interest earned on Government debt owned under its £375 billion economy-boosting programme known as Quantitative Easing (QE).
The cash – currently on the Bank'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 came a day after the Bank 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.
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."