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2011-10-07 12:12:26
Bank of England governor Mervyn King has said this financial crisis could be the worst the UK has ever seen.
His comments came after the Bank authorised the injection of a further 75bn into the economy through quantitative easing (QE).
"This is the most serious financial crisis we've seen at least since the 1930s, if not ever," he said.
Despite criticising the use of QE in the past, Chancellor George Osborne said it was now the right move to make.
The Bank has already pumped 200bn into the economy, under the previous Labour government.
It has done this by buying assets such as government bonds, in an attempt to boost lending by commercial banks.
Mr Osborne also said he endorsed Mr King's view on the severity of the crisis.
"I certainly think it's as serious as anything since the 1930s," he told the BBC.
Slow money
Mr King told Sky News: "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."
Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
Quantitative easing
Quantitative easing
Central banks increase the supply of money by "printing" more. In practice, this may mean purchasing government bonds or other categories of assets, using the new money. Rather than physically printing more notes, the new money is typically issued in the form of a deposit at the central bank. The idea is to add more money into the system, which depresses the value of the currency, and to push up the value of the assets being bought and to lower longer-term interest rates, which encourages more borrowing and investment. Some economists fear that quantitative easing can lead to very high inflation in the long term.
Glossary in full
The Bank's Monetary Policy Committee has been split for months over whether the UK needs a boost to the economy through QE, an increase in interest rates to stave off inflation - which at 4.5% is well over double its target - or to leave things as they are.
Only one member, Adam Posen, has consistently pushed for more QE.
Mr King said the economic landscape was unfamiliar - the world had changed in the past three months and so had the policy response necessary.
He said the amount of money in the economy was not growing quickly enough, and he could not rule out a further bout of QE.
On Wednesday, data showed the UK economy grew by 0.1% between April and June, which was less than previously thought.
"The deterioration in the outlook has made it more likely that inflation will undershoot the 2% target in the medium term," the Bank said in a statement announcing its policy decision.
'All available tools'
Mr Osborne had said in 2009, when he had been in opposition, that "printing money is the last resort of desperate governments when all other policies have failed".
Start Quote
The message running through Mervyn King's answers was that the job of rescuing the recovery couldn't be left to central banks alone - that's true of the UK, and for the broader global economy
image of Stephanie Flanders Stephanie Flanders Economics editor, BBC News
Read Stephanie's blog in full
But speaking to BBC Radio 4's Today programme on Friday, the chancellor said: "We inherited as a government a pretty desperate fiscal position and we had to take action.
"I think the crucial difference this time is that you've got a credible government plan to deal with our debt."
Mr Osborne added that the UK's authorities were using "all the tools available to deal with the worsening global debt storm".
In his speech to the Conservative Party conference earlier in the week, Mr Osborne said that the Treasury would look into "credit easing" - a way to underwrite loans to small businesses who are struggling to get credit now.
He confirmed this in his letter to Mr King, authorising the QE expansion: "Given evidence of continued impairment in the flow of credit to some parts of the real economy, notably small and medium-sized businesses, the Treasury is exploring further policy actions. Such interventions should complement the MPC's asset purchases."