Bank governor Sir Mervyn King warns UK could be facing 'the most serious financial crisis at least since the 1930s if not ever'

The Bank of England has taken action to kickstart Britain's flatlined economy by pumping another £75bn into the banking system, more than economists had expected.

Faced with growing warnings of a double-dip recession and a eurozone crisis, the Bank is setting aside fears about high inflation to increase its programme of quantitative easing (QE).

Explaining the move, Bank governor Sir Mervyn King said that the current financial crisis was "the most serious financial crisis at least since the 1930s if not ever."

"We're creating money because there's not enough money in the economy," King told Sky News. "We're having to deal with very unusual circumstances but react calmly to this and do the right thing."

King denied that the move would damage the UK economy by fuelling inflation, claiming that the rising cost of living would fall back sharply next year. He insisted that it was right to inject more money in the UK economic system by creating another £75bn of electronic money for asset purchases.

"There isn't enough money in our economy. This is very unusual but it's happening. It happened in the 1930s and it's happening now," he said.

The Bank cited slower economic growth at home and abroad, especially in the UK's main export markets, as well as problems in the eurozone, and strains on the banking system.

"These tensions in the world economy threaten the UK recovery," it said in a statement.

"The squeeze on households' real incomes and the fiscal consolidation are likely to continue to weigh on domestic spending, while the strains in bank funding markets may also inhibit the availability of credit to consumers and businesses."

It argued that high inflation was mainly down to factors that would likely subside, such as higher energy prices.

Markets rally

The Bank's bid to shore up the economy boosted confidence in financial markets, with the FTSE 100 closing 189 points higher at 5291. However the pound weakened to a 14-month low of $1.528 at the prospect of more money being printed.

The TUC's general secretary, Brendan Barber, said the decision to expand QE was the right one, but added: "While it is better than not doing anything, quantitative easing is no economic magic wand. We worry that it does more to help the finance sector than the rest of the economy and could fuel further inflation at a time when living standards are already being squeezed."

Business leaders welcomed the move.

Graeme Leach, chief economist at the Institute of Directors, said: "Near zero GDP and money supply growth made a compelling case and the Bank of England was right to launch QE2. It could be argued that the Bank of England was slow to introduce QE the first time, but thankfully it hasn't made the same mistake twice."

Most economists had expected the monetary policy committee (MPC) to delay a decision on more QE until next month when it will have its newest forecasts for growth and inflation. But market players had said the decision would be very finely balanced given the latest downbeat economic data, including news this week that the economy virtually ground to a halt in the second quarter.

MPC members themselves had also indicated they could act sooner rather than later if there were fresh signs of growth tailing off. The Bank also left interest rates on hold at their record low of 0.5%.

The latest move raises QE programme to £275bn. QE effectively puts money into the markets through asset purchases, mainly of UK government bonds, made by the Bank of England. Between March 2009 and January 2010 it bought £200bn of assets, equivalent to about 14% of GDP to help breathe life into the UK economy following the credit crunch.

While the Thursday's move was broadly welcomed by businesses, the CBI lobby group warned there were more threats to an already stalling economy.

"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," said its chief economic adviser Ian McCafferty.