The Governor of the Bank of England today warned that Britain could be enduring the worst financial crisis in history. Sir Mervyn King’s warning came as the bank injected a further £75billion into the economy in a bid to jump-start the UK’s flagging recovery.
Its Monetary Policy Committee (MPC) voted to boost its quantitative easing (QE) programme – effectively printing more cash – from £200billion to £275billion despite the risks it poses to the country’s inflation rate.

Explaining the committee’s reasoning, Sir Mervyn said: ‘This is the most serious financial crisis we’ve seen at least since the 1930s, if not ever. ‘We’re having to deal with very unusual circumstances and to act calmly and do the right thing. The right thing at present is to create some more money to inject into the economy.’

Meanwhile, it maintained interest rates at 0.5 per cent.

The move – the first change to QE since November 2009 – offers the clearest signal yet that the Bank thinks Britain is on the brink of a double-dip recession. The Bank of England said it boosted QE because ‘tensions in the world economy threaten the UK recovery’ and the slack in the economy is likely to be ‘greater and more persistent than previously expected’.

Sir Mervyn added: ‘The world economy as a whole is slowing down much faster than people thought even a few months ago, that’s why it’s sensible for monetary policy to respond to changes – when the world changes we change our response.’

The value of the pound sank against most major currencies following the announcement, while the FTSE 100 Index closed more than 3 per cent higher, boosted in part by the Bank’s decision.

Elsewhere, the European Central Bank (ECB) offered new emergency loans to banks to help steady a eurozone financial system shaken by the region’s deepening debt crisis.

Alan Clarke, UK economist at Scotia Capital, said: ‘Once again the BoE has made use of its secret weapon – shock and awe. Pretty much everyone expected QE to restart at some point – but it was only a minority view that it would start this soon, or in excess of £50 billion.’

Across the water, President Barack Obama has also again urged Europe to act fast to tackle a potentially devastating debt crisis but warned the euro zone will not be able to export its way out of trouble. The President said today he hoped the common currency bloc’s leaders will have put a concrete plan in place by the time of the next meeting of Group of 20 wealthy nations in France early next month.

A report by the Bank into the effect of QE on the British economy previously found that the stimulus measure provided a ‘significant’ benefit to growth and helped GDP increase by around 1.5 per cent and 2 per cent. This was equivalent to dropping interest rates by between 1.5 per cent and 3 per cent, the Bank found.

Ian McCafferty, CBI chief economic adviser, said the Bank had ‘acted promptly’ in the face of risks to the economic outlook. He said: ‘This measure will help support confidence, but we need to recognise that its impact on near-term growth prospects is likely to be relatively modest. Only once the turmoil in the eurozone is resolved will confidence be fully restored.’

The committee also warned the squeeze on household incomes and the Chancellor’s austerity measures are likely to continue to restrict spending while ongoing strains on the banks will limit credit supply.

The deterioration in the economic outlook means it is more likely that inflation – which hit 4.5 per cent in August – will undershoot the 2 per cent target in the medium term, the Bank added.

David Kern, chief economist at the British Chambers of Commerce, welcomed the move but said increasing QE was not enough to support businesses.

‘In the face of the risks facing Britain’s recovery, it is important to make every effort to underpin business confidence and avoid a setback,’ he said. ‘However, higher QE on its own is not enough, and we urge the MPC to look at other radical methods.’

John Walker, national chairman of the Federation of Small Businesses, said it was vital the cash went to businesses and was not swallowed up by the banks. He said:
‘It is important that in an attempt to boost short-term demand that small businesses can directly benefit from this cash injection and that the banks use it to decrease the cost of credit and to increase the availability of lending.’

Before the announcement, former chancellor Alistair Darling today cast doubt on whether another £50billion of QE will be enough to salvage the economic recovery.
He told the BBC Radio 4’s Today programme: ‘This, to me, just looks like the beginning of Plan B where George Osborne is getting the Bank of England to do something that he knows is necessary, and that is start to put more money into the economy.
‘Unless you do something to address the lack of confidence in the economy, which is really holding back businesses… then my fear is we are going to have a long period of no growth whatsoever and that will mean that the day on which we can actually reduce our borrowing is going to be put off again and again.’

The Bank could wait until November or beyond, but grim growth figures yesterday that showed the British economy in worse shape than previously thought increased the likelihood it could act today.

Office for National Statistics (ONS) data showed the UK economy grew by just 0.1 per cent in the second quarter of the year and 0.4 per cent in the first quarter – slower than the 0.2 per cent and 0.5 per cent previously reported. The ONS also said the economy shrank by 7.1 per cent in the recession – more than the 6.4 per cent originally thought.

Jonathan Loynes, chief European economist at Capital Economics, said it was ‘further justification’ for the monetary policy committee to restart the printing presses as early as today despite inflation being more than double the 2 per cent target at 4.5 per cent.

James Knightley, economist at ING Bank, said he expected the BoE to wait until November before embarking on a programme to print another £300billion.

The BoE has already pumped £200billion into the economy and cut interest rates to 0.5 per cent to stimulate growth. No change to rates is expected today although minutes from last month’s meeting revealed MPC members had discussed a shock rate cut to 0.25 per cent.

‘We are not concerned at all about inflation,’ the IMF said. It came after figures showed the eurozone’s services sector shrank for the first time in two years in September and the debt crisis hit the real economy.

In the UK, the slowdown has been driven by a steep fall in household spending – the lowest in 10 years – as tax hikes, the soaring price of everyday goods, and muted or non-existent pay rises hit living standards, the ONS confirmed yesterday.
Household spending fell 0.8 per cent between April and June and 0.6 per cent in the previous three months.

That amounts to £620million less in the three months to June, compared to the start of the year – or £30 per household.

Meanwhile, spending on leisure such as holidays and entertainment plummeted by a whopping £1.6billion over the second quarter.