Banks in UK and eurozone act to boost output

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 per cent 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 could 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 per cent – 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”.

It said inflation, which fell to 2.8 per cent in May, was in danger of slipping below its 2 per cent target and its stimulus measures should help sustain a gradual strengthening in output.

The gloomy assessment came amid signs the economy deteriorated in June as industry surveys showed that the construction sector went into reverse and the powerhouse services sector suffered its worst performance for eight months.