The City was bracing itself for fresh stimulus from the Bank of England on Wednesday night after it emerged that the outgoing governor Sir Mervyn King is pressing for additional electronic money creation to boost growth.
Sterling fell sharply on the foreign exchanges following the release of the minutes of the February meeting of the Bank's monetary policy committee (MPC) which showed King joining two other policy makers – David Miles and Paul Fisher – in voting for an extra £25bn in quantitative easing (QE).
The governor lost the vote on the nine-strong committee by six votes to three but financial markets were taken aback by evidence that the MPC had a full-blown debate about what it could do to next to help the UK's weak economy.
The City had expected only Miles to vote in favour of increasing the QE programme to £400bn and the minutes triggered a fall in sterling; it ended the day at its lowest level in 17 months when measured against a basket of world currencies. The pound lost more than more than a cent against the dollar to close at just below .53, while the euro rose to 87.645 pence, its highest level for more than a year.
Ed Balls, the shadow chancellor, attacked George Osborne by seizing on a section of the minutes that warned that the Bank could not transform the outlook for growth on its own and that "other authorities" might need to use "targeted interventions to boost demand the supply capacity of the economy."
Balls said: "The Bank of England is losing patience with this chancellor. With interest rates at record lows and billions of quantitative easing already tried, there is only so much more the Bank of England can do through monetary policy.
"George Osborne must finally heed the warnings and realise that his fiscal policies, which have crushed growth and confidence in our economy, must now change before more long-term damage is done."
The minutes show that King, Miles and Fisher argued further action to stimulate activity was needed to prevent "potentially lasting destruction of productive capacity and increases in unemployment".
Although inflation is expected to be above the government's 2% target for the next two years, the three dissenting voices on the committee said they did not think additional QE would lead to further upward pressure on the cost of living.
Those opposing further QE said the Bank had already given a "substantial" stimulus to the economy and expressed concern that QE was becoming less effective. With inflation already above target, there was a risk further asset purchases would send the wrong signal to the public.