With the interest rate rapidly approaching zero, the chancellor Alistair Darling is this week expected to give the Bank of England permission to print more money in an effort to revive the economy.
The central bank is expected to announce another base rate cut on 5 March; but with this already at an historical low of 1%, it is fast running out of options to kick-start the UK's flagging economy.
It is anticipated that, immediately after the cut is announced, Darling will give the Government's formal approval for the Bank of England to inject an additional £150 billion into the economy through a measure known as quantitative easing.
The move will be a last-ditch attempt to revive the flagging economy. Despite the central bank's Monetary Policy Committee (MPC) cutting the base rate from 5% in October to just 1% in February, the impact of these cuts grows ever more muted and the argument for more decisive action gets ever louder.
Action so far
The MPC is expected to vote for a 50 basis point cut on Thursday, although it could go as far as reducing the rate to just 0.1%. But the effectiveness of taking the interest rate to a new historical low is under doubt.
Apart from concerns that only tracker mortgage borrowers are benefiting from rate cuts, and warnings that prudent savers are being the most severely punished, the economy continues to contract and the recession shows no sign of abating.
In addition, the base rate cannot fall turn negative and with it edging ever closer to 0%, there is only so much more monetary policy can achieve.
The Government has repeatedly stated that getting banks to lend again is essential for economic recovery, and its bail-out measures aim to achieve just that by insuring firms against future losses.
Last week, the Government stepped up its bail-out measures, with Royal Bank of Scotland confirming its participation in the Treasury's Asset Protection Scheme. Northern Rock also announced it intends to beef up its mortgage offering.
Economists are divided over how effective the Asset Protection Scheme will be. But the Treasury has another card up its sleeve.
By giving the Bank of England permission to inject more money into the economy through quantitative easing, it hopes to reduce the financial pressures on banks and enable them to lend more widely to consumers and businesses.
In recent weeks the MPC, which is responsible for setting the interest rate, has hinted that it intends to provide an "additional stimulus" to the economy. The interest rate cannot fall below 0%, and as cuts look increasingly ineffective in the face of the flagging economy an alternative economic measure must be found and pursued.
One MPC member, Andrew Sentence, recently indicated the central bank was about to take a leap in the dark with quantitative easing.
"A persistent and prolonged period of deflation still remains an outside risk in my view," he said. "But there is a strong case for providing additional stimulus to the economy to head it off more decisively."
But is printing more money really the answer to the economic crisis, and what impact will it have on the economy and on your finances?
How does quantitative easing work?
Quantitative easing is often referred to as printing money, but technically no physical notes are produced. Instead, the Bank of England creates more money for itself electronically.
The new money is then used to buy assets, such as gilts and bonds, from banks, insurers and pension providers.
Participants will then not only improve the health of their balance sheets, they will also increase the amount of cash in their coffers. Of course, there is no guarantee that this money will be used to step-up lending.
But as banks see their reserves increase in relation to securities, they will need to offload some of this money to ensure a balanced book. The Treasury is also likely to make it a condition of quantitative easing that participants channel the money into their lending operations.
At the same time, by decreasing the supply of gilts, the Bank of England will effectively be pushing up their price. As gilt prices increase, their yields - or potential for income - fall.
Gilt yields are used to set interest rates on overdrafts, some fixed-rate mortgage products and business loans. Lower rates should make borrowing more attractive to consumers.
Will it work?
The potential impact of quantitative easing is unclear. While the measures looks good on paper, the extraordinary circumstances the UK economy currently finds itself in could distort their significance.
For example, while lower interest rates on mortgages, business loans and overdrafts should encourage consumers to borrow, a lack of confidence and job insecurity could offset the temptation.
Vicky Redwood, UK economist at Capital Economics, says the effectiveness of quantitative easing depends on how "vigorously the Bank of England embraces it". She adds: "The main danger is doing too little, too late."
Meanwhile, Howard Archer, an economist at Global Insight, is broadly optimistic that printing more money will help the UK economy. But, he warns: "Quantitative easing will take time to have an impact and there will not be an immediate turnaround or a sharp improvement."
There is also a risk that quantitative easing could cause an uplift in inflation, with prices potentially rising rapidly. With the Consumer Prices Index (CPI) - the Government's official measure of inflation - still 100 basis points above its target 3%, the last thing British households need is further price rises.
However, on the plus side, the depressed state of the economy could lessen the danger of a sharp rise in inflation. The Bank of England's latest Inflation Report predicted that inflation will fall to 0.5% by the end of 2010, and more bearish economists believe that the UK will in fact enter a period of deflation, with prices across the board turning negative.
In the short-term, inflation could help lift the UK out of a dangerous deflationary spiral. But, once the economy starts to recover, too much money in the system could risk inflation rising quickly and the Bank of England could be forced to reduce the supply of cash by selling off its assets.
