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The Bank of England will start pumping newly created money into the economy today by buying £2 billion in gilts as it embarks on "quantitative easing" in an effort to boost the economy.

The central bank, which has already slashed interest rates by 4.5 percentage points to a record low of 0.5 per cent over the past six months, said last week that it would initially pump £75 billion into the economy via twice-weekly gilt auctions, but has permission from Alistair Darling, the Chancellor, to create another £75 billion if it needs to.

Mervyn King, the Governor of the Bank, indicated last week that the Bank would continue this course of action until the lending markets became unglued.

The first auction, at midday today, will allow pension funds and other institutional investors that hold Government bonds — otherwise known as gilts — to sell these to the Bank in return for cash.

It is hoped that after the auctions take place, the new money will be placed in their accounts with UK banks, boosting the banks’ deposit bases and, hopefully, allowing them to go out and lend more in the wider economy.

But later this afternoon, at 2pm, the second stage of the "reverse-auction" will allow banks to participate directly, selling gilts that they hold to the Bank.

These auctions will be held every Monday and Wednesday from now on, and the results of the auctions will be published by the Bank every Friday at 10am.

But the Bank's announcement has already had some effects.

Benchmark ten-year bond yields fell to a record low of 2.95 per cent at the beginning of the week and sterling swap rates, used by banks and building societies to calculate fixed-term mortgage rates, have also dropped, indicating that lenders should be able to offer more competitive home loan rates.

Corporate borrowing costs have also fallen by between 0.44 and 0.72 percentage points, according to the sterling iBoxx index.

But economists have warned that the real success of quantitative easing will depend on whether banks use the extra deposits to lend more, or simply hoard the cash using it to shore up their capital base.

In theory banks can lend out more than they receive in deposits, as the risk of every depositor asking for their cash to be returned at the same time is low.

The extent to which banks' lend additional money is known as the "multiplier".

Jonathan Loynes, of Capital Economics, said: “In theory, the 'multiplier' effects are potentially very powerful and could turn the initial £75 billion of asset purchases into a sharp rise in nominal GDP.

“But these effects are likely to be very muted in the current economic environment, as banks decide to hoard a proportion of the rise in their reserves and firms and households sit on cash rather than spend it. If so, the impact of the policy could be almost negligible."

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