Banks act to give economic boost

The Bank of England and its eurozone counterpart have taken emergency action to breathe life into their struggling economies.

The UK economy - threatened by the deepening crisis on the continent - received a £50 billion injection from the Bank as the country struggles to emerge from recession.

In Frankfurt, the European Central Bank (ECB) cut its key interest rate to a record low of 0.75% amid signs the 17-nation currency bloc contracted in the second quarter. The action comes after a period of escalating turmoil in the eurozone, which has seen borrowing costs in countries such as Spain and Italy climb higher.

But economists questioned how much further central banks can go to help.

Tim Ohlenburg, senior economist at the Centre for Economics and Business Research, said: "Central bankers need to reach deep into their toolbox to find ways of propping up prices by somehow stimulating economic growth. With quantitative easing bringing little effect and interest rates near rock bottom, it's likely that new tools will be devised in due course."

The measures provided an initial boost to world markets but the rally was shortlived. Both the pound and the euro weakened.

The Bank - which also held interest rates at 0.5% - said its decision came as the eurozone crisis weighed on confidence and hit some of the UK's main export markets. The UK's economy has barely grown for a year and a half and it warned the weak outlook meant "the margin of economic slack is now likely to be greater and more persistent".

While business body the CBI said the QE may boost confidence, the stimulus package was criticised because it will hurt pensioners by pushing down annuity rates and may also push up inflation.

David Kern, chief economist at the British Chambers of Commerce, said the effect of QE will be "marginal" and "could be counter-productive". He said: "It may limit the decline in inflation in the long term, at a time when we need falling inflation to underpin real incomes and boost demand in the UK economy."

Howard Archer, chief economist at IHS Global Insight, said there might still be more money printing to come, even though he thinks the economy will return to growth in the third quarter of this year. He said: "We certainly would not rule out further QE in the fourth quarter. The economy is likely to remain fragile and prone to relapses, especially if there is not any sustained marked easing in the eurozone's problems."