Britain has stepped up its action against the eurozone crisis by agreeing to offer billions of pounds in cheap loans to British banks, in co-ordinated action that took markets by surprise.
The government and Bank of England (BoE) announced the surprise plan late Thursday in London in a bid to force commercial banks -- which are reluctant to lend amid the threat of a Greek exit from the eurozone -- to lend to businesses struggling amid Britain's recession.
But the move prompted fresh warnings from the main opposition Labour party that Britain's austerity drive and current stimulus projects were not working.
The action plan comes in addition to the BoE's Quantitative Easing project policy, under which it has injected £325 billion (400 billion euros, $505 billion), of new money into the British economy since 2009.
"UK policymakers last night announced that they are significantly stepping up their efforts to try to cushion the UK economy from the effects of the eurozone crisis," said Vicky Redwood, chief UK economist at the Capital Economics consultancy.
"The measures should help to ease strains in the banking sector, but there are question marks over whether they will actually result in higher lending to the private sector," she added on Friday.
Bank of England Governor Mervyn King said in a speech on Thursday to coincide with the announcement of the fresh stimulus measures that the eurozone crisis had "grown to cast a long shadow over" Britain's own economic recovery.
King added that "exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times."
Britain, which is a not a member of the single currency bloc, relies on the eurozone for much of its trade.
Finance minister George Osborne, speaking alongside King, said a lack of credit was "damaging businesses and costing jobs."
He added: "The government -- with the help of the Bank of England -- will not stand on the sidelines and do nothing as the storm gathers."
Despite possessing a massive public deficit of its own, the British government is enjoying unusually low borrowing costs as investors see its bonds as a safe haven from the eurozone crisis.
King revealed that the BoE would activate measures announced in December which it is hoped would provide short-term liquidity of at least £5.0 billion per month to banks.
The first auction under the so-called Extended Collateral Term Repo (ECTR) Facility would take place on Wednesday, the BoE said.
In addition, a "funding for lending" scheme due to begin in a few weeks -- and lasting several years -- would offer cheap loans to banks in exchange for a wide range of collateral and on the condition that they increased lending to small businesses.
Reports said that about £80 billion would be made available under the "funding for lending" scheme.
"The BoE's latest plans are a welcome development as it helps by-pass a damaged ... mechanism -- where banks are deleveraging their balance sheets to repair the damage from over-exposure to the eurozone as well as having to raise capital," said Neil MacKinnon, an economist at VTB Capital financial group.
"The problem is that the excess liquidity created by QE is staying in the banking system and not being recycled in to the real economy through an increase in bank lending.
"Small and medium sized businesses have well-documented problems in accessing credit and in situations where they do access credit, it is usually at an expensive price," MacKinnon told AFP.
Labour's finance spokesman Ed Balls insisted that the proposals "do not go far enough," adding that the new action plan "is a significant admission that the government's existing policies have failed."
Britain escaped a deep downturn in late 2009 but fell back into recession in the final quarter of 2011 on the back of state austerity measures and the eurozone debt crisis.
Britain's Conservative-Liberal Democrat coalition administration has slashed public spending and hiked taxes since it won power in 2010, after inheriting a record deficit from the previous Labour government.
Source: AFP Global Edition