The Bank of England is to pump money into the market over Christmas and the New Year and not claw it back until the second week in January.
This is to prevent banks intensifying the credit crunch as they tidy up their balance sheets for New Year's Eve.
Giving evidence to the Commons Treasury Select Committee yesterday, the Bank's governor, Mervyn King, told MPs the continuing fragility of the banking system poses a risk a squeeze linked to the banks' year-ends could cause overnight rates in the money markets to run ahead of the Bank's official rate, at present 5.75.
To forestall this, the Bank will make £10 billion available at 5.75 per cent for an unprecedented five weeks, starting next week.
"We stand ready to take further measures in order to keep the overnight rate in line with bank rate," Mr King said. "This is similar to the measures announced in recent days by the (US) Federal Reserve and the European Central Bank. We are keeping money markets under constant review."
He described the short-term outlook for inflation as "rather uncomfortable". World food and energy prices have risen sharply and the latest data on earnings growth look "somewhat less benign than before", he added.
"The (monetary policy) committee's current judgment is the most likely out-come is for output growth to slow and inflation to rise, at least for a period. The outlook is also highly uncertain, which makes the task of navigating through the next few months far from straightforward."
Highlighting the implications of the credit squeeze, Mr King said it is simply a matter of time before it hits investment spending. Banks are less willing to lend and this will soon impact borrowing. Already there were signs of a slowing housing market, mortgage lending is likely to be dented and commercial property may be worst hit.
He warned the impact of tighter credit conditions will show up eventually, even though so far things appear to have held up. "How far will this impact on investment outside the financial sector, that is the real uncertainty," he said.
David Blanchflower, who has been the most consistent committee member voting for cheaper borrowing, told MPs fears of a US recession had increased. He noted evidence of a drop in the number of people visiting shops, suggesting consumer spending may be dented.
For him and Rachel Lomax, a deputy governor, the greatest risk facing the British economy is the possibility of a sharp slowdown in consumer credit.
Another committee member, Tim Besley, highlighted the risk investment projects will be delayed. The MPC will have to weigh up the prospects of higher inflationary pressures against the extent of the slowdown in the real economy in fixing interest rates, he added.
Professor Blanchflower called for a pre-emptive cut to get ahead of the curve while news flow in the housing market continues to deteriorate.
Mr King stressed the importance of coming economic data. "We shouldn't pretend we can be confident as to what is going to happen, but actually look at the numbers as they come in," he insisted.
The rebalancing of the world economy is being made difficult by inflexible exchange rate regimes in Asian emerging markets, where central banks have clung too long to rigid links with the dollar, he argued. This criticism was aimed mainly at China.
Howard Archer, UK economist at the consultants Global Insight, concluded: "The overall tone suggests that they are generally reluctant to cut interest rates as soon as December."