The Bank of England (BoE) said on Thursday it would inject ?10 billion (US$20.6 billion) into money markets amid the ongoing credit crunch sparked by the US subprime loan crisis.
The move comes as British central bank Governor Mervyn King warned there was a risk of a more substantial credit squeeze in the coming months.
The US subprime loan crisis was sparked by a growing number of Americans with patchy credit histories failing to meet payments on their mortgages.
That in turn led to a global credit tightening as commercial banks turned cautious about lending money to each another.
The BoE said in a statement on Thursday that the extra funds would be provided "in order to alleviate concerns that money market conditions will be particularly tight over the year-end and to provide greater assurance to banks in managing their liquidity positions over the period."
The money would be injected on Dec. 6 and become repayable within five weeks, rather than the usual seven days, the central bank said.
It would be offered at the bank's key interest rate of 5.75 percent.
British Chancellor of the Exchequer Alistair Darling, speaking in parliament on Thursday, said the BoE announcement was "the right thing to do."
Earlier on Thursday, King told British lawmakers at a parliamentary hearing that there could be worse to come following the recent turmoil on world financial markets.
"Despite the accumulation of significant amounts of liquidity by many of the larger banks, markets are fearful that further falls in asset prices might impair the balance sheets of many banks," King said.
"Although that fear has so far run well ahead of realized losses, it has the potential to lead to a further tightening in credit conditions," he said.
King also predicted that a period of uncertainty lay ahead for the British economy given wider global problems stemming from the US subprime housing crisis.
"The outlook is ... highly uncertain, which makes the task of navigating through the next few months far from straightforward," King told the Treasury Select Committee.
Earlier this year, Darling forecast that the economy would grow at a slower-than-expected rate next year because of the fallout from the global credit squeeze.
Darling had said growth would likely come to 2.0 percent to 2.5 percent next year -- a downgrade from a forecast of 2.5 percent to 3.0 percent.
King said on Thursday: "Recent economic news has been dominated by the continuing turmoil in global financial markets which has led to a tightening of credit conditions, particularly for the most risky borrowers.
"In the UK, the consequences are difficult to assess and are likely to be evident first in the housing and commercial property markets," he said.
"At the same time, world energy and food prices have risen sharply, and the latest data on earnings growth look somewhat less benign than before so the short-term outlook is rather uncomfortable," he said.
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