The Bank of England is to provide short-term sterling liquidity to the banking sector in anticipation of "market-wide stress of an exceptional nature" over the coming weeks.
Giving his annual Mansion House speech last night, Bank of England governor Mervyn King said the macroeconomic picture had weakened over the past month.
He said the Bank was ready to provide extra measures of support to the financial sector and the real economy. King said the Bank is to activate the Extended Collateral Term Repo Facility announced last December, under which the Bank can hold auctions of sterling liquidity with a maturity of six months.
"It is now time to activate [the] scheme, in the words of the Bank's Red Book, 'in response to actual or prospective market-wide stress of an exceptional nature' over the coming weeks," he said.
The Bank will issue a market notice this morning providing detail of the timing and size of the auctions.
Separately, the Bank and the Treasury are to roll out a "funding for lending" scheme which will provide funding to banks at below market rates for a multi-year period providing they sustain or expand their lending to the UK non-financial sector.
The £100bn scheme was announced by Chancellor George Osborne last night at the same event.
King said he hoped the scheme would be in place "within a few weeks".
"Since our Inflation Report only four weeks ago, conditions have deteriorated with weakening business surveys, a downward revision to measured output, and further slowing in economies overseas," King said. "The measures that I have outlined will support the banking sector and provide it with incentives to increase lending to the real economy," he said.
Both the governor and chancellor George Osborne rejected suggestions that the Bank's quantitative easing programme had reached the limits of its effectiveness.
King also dismissed talk that the Bank should extend QE to include the purchase of private sector assets, saying the bank had no democratic mandate to put taxpayers' money at risk.
He suggested buying risky assets has implications for future taxes and warned of the dangers to Bank independence that such moves would imply.
"There may be circumstances in which purchases of risky assets would be justified, but the decision as to which assets to buy, and hence which activities and individuals to subsidise, should be taken by the elected government.
"I rather doubt that Bank independence, essential in my view for monetary policy, would survive the extension of its responsibilities into areas that are the proper domain of government, as recent debates in Parliament suggest."