The Government has announced plans to inject billions of pounds into the UK 's financial system in a bid to boost lending to businesses and consumers.
Chancellor George Osborne said the scheme, which is a joint venture between the Treasury and Bank of England, would make £80 billion available to banks in the form of cheap loans so that they could deal with the "exceptional market stresses".
Banks would then be expected to provide loans where most needed - to businesses and consumers.
It is hoped that the measure will improve the UK 's outlook in the face of the worsening economic crisis in the eurozone.
"We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep," Mr Osborne said.
The initiative adds to the £325 billion that has been pumped into the economy through Quantitative Easing (QE). What makes this scheme different, however, is that the funds will be made directly available to banks, instead of being used to buy assets such as Government and corporate bonds from financial institutions, which then boosts their liquidity, fuelling lending to the private sector.
"Today's exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times," said the Governor of the Bank of England, Mervyn King.
"The Bank and the Treasury are working together on a 'funding for lending' scheme that would provide funding to banks for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending to the UK non-financial sector during the present period of heightened uncertainty."
Shares in banks have risen following the announcement last night, with Lloyds TSB and Royal Bank of Scotland shares jumping by almost 4% and Barclays' shares rising by 2.75%.
In response to the plan, the consumer watchdog Which? called on the Government to make sure clear safeguards are in place so that banks pass this cheap credit on through loans to small businesses, and to consumers through lower interest rates on mortgages.
"For too long, banks have taken advantage of the lack of competition on the high-street to increase the interest rates charged on mortgages, loans and overdrafts. We want to see more choice on the high street with banks genuinely having to compete for customers by offering better value and better customer service," said Which? executive director Richard Lloyd.
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