Britain's cash-strapped government yesterday said it would grab an expected £35 billion ($55.9 billion) windfall from the Bank of England (BoE)'s bond-buying programme to reduce short-term borrowing.

BoE governor Mervyn King said the move equated to a modest loosening of monetary policy, potentially giving a boost to the stagnant economy, and economists said it may help finance minister George Osborne meet his debt reduction targets.

But the government's budget watchdog warned the step would bring longer-term costs once interest rates start to rise, and some analysts said it raised concerns about the central bank's independence and the possible future monetisation of debt - traditionally viewed by economists as a big inflation risk.

Until now, the BoE has kept the interest earned on £375 billion of government debt it has bought since March 2009 under an asset purchase programme aimed at boosting Britain's economy. Those payments will total around £35 billion by next March.

But now the BoE will have to transfer this money and future interest payments back to the government - bringing British practice in line with that in the US and Japan, which also have central bank asset purchase schemes.

"Holding large amounts of cash (by the BoE) is economically inefficient as it requires the government to borrow money to fund these ... payments," the finance ministry said, adding that it would use the money saved to reduce public borrowing in the current and future tax years.

Earlier, the BoE's monetary policy committee decided not to conduct further asset purchases, and King said he had told the MPC of the government's plans before they made the decision.

"The committee views the use of coupon income to reduce the stock of outstanding gilts as having an effect similar to the MPC purchasing gilts of the same value," King said.-Reuters