The Bank of England and the Treasury officially fired the starting gun this afternoon on a £50 billion scheme aimed at boosting the flow of credit in the economy.

A public exchange of letters between Chancellor Alistair Darling and Mervyn King, the Bank Governor, confirmed that the Bank will set out next week the framework in which its planned Asset Purchase Facility will operate.

The news follows Mr Darling’s announcement, last week, of a fresh package of proposals aimed at reviving economic activity and takes Britain closer towards so-called "quantitative easing" — effectively printing money.

The policy is similar to that undertaken by the US Federal Reserve and the Bank of Japan during the last few months.

In his letter, Mr Darling cleared the Bank to buy up some £50 billion worth of “high-quality private sector assets” and promised that the Government would indemnify the Bank against any losses arising from the purchases.

He confirmed that the buying would be funded by gilts and Treasury bills — Government IOUs — and said the Bank would need to be convinced that there was a “viable private market demand” for the types of assets it buys.

This does not, technically, count as printing money because the sums involved will effectively be borrowed from other individuals and institutions lending money to the Government.

In his reply, Mr King confirmed that the Bank would concentrate initially on buying corporate bonds and commercial paper — IOUs issued by companies — but promised to consult with market participants about the possibility of buying other instruments, notably syndicated loans and asset-backed securities.

The Governor also promised that the Bank would report on the transactions carried out under the scheme on a quarterly basis. He said that, where appropriate, information on specific purchases would be made available through regular market announcements. He said he hoped that, by offering to buy assets on a regular and ongoing basis, the scheme would improve liquidity in the market.

The news sparked an immediate rise in gilt yields, with two-year yields rising by 3.3 basis points to 1.510 per cent, five-year yields by 5.3 basis points to 2.887 per cent and 10-year yields by 8.5 basis points to 3.729 per cent.

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