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Central bankers yesterday battled to jump-start the flagging recovery amid fears the world is on the brink of a new recession.The US Federal Reserve launched a $ 400bn programme dubbed  Operation Twist to lower long-term borrowing costs and bolster  confidence in America.The move spooked the markets, wiping 283.8 points off the Dow, which closed down 2.5 per cent at 11,124.8.



Showtime: US central bank has launched package to bring down borrowing costs

And the programme came just hours
after the Bank of England gave the clearest signal yet it is ready to
pump more money into the ailing British economy.BoE
chief economist Spencer Dale warned of a ‘pronounced downward spiral’
in the global economy and said the outlook in the UK has ‘weakened quite
materially’.The
dramatic intervention by the Fed and BoE underlined the level of concern
on both sides of the Atlantic about the darkening economic outlook.
 



Sterling outlook: What next for the pound?

The
International Monetary Fund this week warned the world has entered ‘a
dangerous new phase’ and that America and Europe are at risk of tipping
back into recession.In a bleak World Economic Outlook, the Washington-based Fund slashed US growth forecasts for this year from 2.5 per cent to 1.5 per cent, the eurozone from 2 per cent to 1.6 per cent, and the UK from 1.5 per cent to 1.1 per cent.The
Fed, led by chairman Ben Bernanke, responded last night by outlining
plans to sell $ 400bn of shorter-term government debt to fund the
purchase of longer-term bonds.It
is hoped the operation – dubbed Twist after it was first tried in 1961
when Chubby Checker’s cover version of The Twist was a hit – will lower
long-term borrowing costs for households and businesses. The Fed also
said it will step into the fractured mortgage market.‘There are significant downside risks to the economic outlook, including strains in global financial markets,’ the Fed said.It reiterated its pledge to keep interest rates ‘near zero’ until at least mid-2013 as long as unemployment remains high.The Fed cut rates to between zero and 0.25 per cent in December 2008 and has since pumped $ 2.3trillion into the US economy through quantitative easing.Economists
now expect the BoE to take action to stimulate the British economy with
another round of QE of its own. It injected £200bn into the UK economy
between March 2009 and January 2010 by snapping up government bonds.Minutes
from the September meeting of the Monetary Policy Committee showed just
one member – arch-dove Adam Posen – voted for further QE this month.But
for ‘most’ of the remaining eight the decision was ‘finely balanced’
and ‘the weakness and stresses of the past month had significantly
strengthened the case for an immediate resumption of asset purchases’.
The minutes said: ‘For some members, a continuation of the conditions
seen over the past month would probably be sufficient to justify an
expansion of the asset purchase programme at a subsequent meeting.’The
pound tumbled against the euro and the dollar as traders bet further QE
is on its way – possibly as much as £100bn starting as soon as next
month.Dale, who started
voting for rate hikes in February but reversed his position in August,
said he was prepared to vote for more QE to stave off recession. ‘If the
economic situation continues to deteriorate, some additional loosening
in monetary policy might be needed,’ he said.‘The deterioration in the outlook largely reflects developments outside our shores. Growth in the world economy has slowed.‘Concerns
about the fiscal positions of some countries have intensified. This in
turn has fuelled worries about the resilience of the international
banking system.‘These factors have fed on each other, leading to a pronounced downward spiral. The UK has been caught in the fallout.’