The Bank of England’s package to restore liquidity and confidence to the money markets could provide the economy with a significant boost and head off part of the widely expected economic downturn, analysts say.

While details of the package were still being hammered out this weekend, the broad shape is believed to be a £50 billion swap arrangement in which the Bank will take mortgage-backed securities onto its books in return for gilt-edged securities.

The arrangement is intended to run for just over a year, by which time the authorities believe a degree of normality will have returned to credit and money markets, particularly the market in mortgage-backed securities.

While officials refused to speculate on the arrangement ahead of this week’s announcement, sources close to the discussions said it would involve the the Bank imposing a “hair-cut” on the securities it takes onto its books – valuing them at a discount.

Banks taking part would have the flexibility to opt out of the swap if market conditions improved, though the Bank would also have the right to call in additional collateral should conditions in the housing market, for example, deteriorate sharply.

The package has been master-minded by Mervyn King, the Bank governor, in consultation with chancellor Alistair Darling and senior Treasury officials – who will have to sign off the arrangement and order the additional issuance of gilt-edged securities.

Along with King, deputy governor Sir John Gieve and head of markets Paul Tucker have been most closely involved at the Bank. The senior Treasury officials advising Darling and Gordon Brown have been Dave Ramsden, head of its macroeconomics division, and Tom Scholar, who recently returned to the Treasury after a brief spell as Brown’s chief of staff at 10 Downing Street, and who heads the Treasury’s financial-services arm.

While it is recognised that this week’s package is only one element in containing the effects of the credit crunch, there is optimism at the Treasury this weekend that Royal Bank of Scotland’s proposed rights issue was greeted enthusiastically by the markets. The hope is the package maintains the improvement in sentiment.

“It is not the solution but it is part of the solution,” said one senior banker. The banks have become frustrated waiting for action from the Bank and have accused King of dragging his feet.

Peter Spencer, economic adviser to the Ernst & Young Item club, which uses the Treasury’s model of the economy, warns in a report this weekend that the economy is on course to slow to 1.5% growth next year after a weak 1.8% this year, alongside a 10% fall in house prices.

But Spencer, who said the need for action from the authorities was urgent, said that it was possible that the Bank, if successful, could both stabilise and improve the outlook. “If it does the job things could look quite a lot better next year,” he said.

The Item forecast is for a significant rebalancing of the economy on the back of a weaker pound and the squeeze on household spending. It sees the share of gross domestic product taken by consumer spending dropping from 63.5% to 61%, balanced by a rise in the contribution of net exports. Spencer said this shift was likely to continue even if the Bank was successful in stabilising the markets. Economists do not expect credit conditions to return to where they were before the global financial crisis hit last summer.

Michael Hume of Lehman Brothers said the Bank’s scheme appeared to be along the right lines. “Providing banks with funding for an extended period would be a genuine novelty that would – if we are right that the principal problem is one of liquidity funding risk – get at the heart of the problem,” he said.

However, he warned that the liquidity facility might eventually need to be much bigger than is now envisaged. “Given the scale of wholesale funding it is questionable whether, say, £50 billion, or even £100 billion, would be enough,” he said.

Darling will meet mortgage lenders on Tuesday to discuss ways to help homeowners in difficulty.

Explore Economics

• Pre-Budget Report 2009

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive