It pledged for the first time in its 315-year history to start effectively printing money as its main means of controlling the economy, warning that this was the only way to prevent the UK from suffering a lengthy recession and potentially becoming mired in deflation.
The move means that for the first time, interest rates are no longer the primary tool for monetary policy, with the Bank instead directly pumping cash into the system.
The Bank announced the radical step after cutting rates by half a percentage point to an all-time low of 0.5 per cent yesterday - the lowest it judges they can go without causing the entire financial system to malfunction.
The decision to create more cash, announced by Bank Governor Mervyn King and the Chancellor of the Exchequer Alistair Darling yesterday, is regarded as a last gasp measure for the authorities to prevent Britain from sliding into a 1930s-style depression.
However, with little evidence that so-called quantitative easing has succeeded elsewhere in the world, experts voiced fears about the consequences of these "nuclear" economic measures.
Some fear that this extra infusion of cash will generate a tidal wave of inflation some years in the future, consigning Britain to many years of either high inflation or perhaps even Zimbabwe-style hyperinflation if left unchecked. Others voiced worries about the economic legacy the unprecedented move will leave future generations, with the economic policy textbook having been torn up amid the current crisis.
The Bank's own Monetary Policy Committee member Andrew Sentance has described the new post-interest rates world as representing "a step into the unknown". Under the new system, the Bank will keep interest rates at this close-to-zero rate for the foreseeable future. It will instead attempt to boost the economy by buying a variety of assets such as corporate and government debt from investors such as pension funds and insurance firms.
Importantly, however, it will pay for these assets not with a pre-raised cache of funds but by creating new money and transferring it to the investors. Mr King said the Bank will create up to £150 billion of cash to spend on the scheme, with the first £75 billion to be spent in the next three months, starting next Wednesday. The total is equivalent to just under £5,800 for every household in Britain. However, should the scheme fail to spark any growth in the economy, the amount it will spend is likely to soar even higher.
"The world economy has turned down very rapidly since last Autumn, the amount of money is not growing at all, and the economy is in a recession, so we need to increase the supply of money," said Mr King.
The effect will be to funnel a significant amount of money directly into the financial system. Although the £150 billion is a significant figure, equivalent to just over a tenth of Britain's entire annual economic output, the Bank hopes that the eventual effect of the injection will be far greater since it will encourage investors who receive the money to go out and spend it in the economy, helping bring the credit crunch to an end.
The Bank has had a team of ten experts working on constructing the scheme just before Christmas, as it became increasingly obvious that interest rates were failing to stimulate the economy.
Graeme Leach, chief economist at the Institute of Directors, said: "We strongly support quantitative easing and think it will be most effective if the Bank is aggressive in its use.
"Markets need to see a shock and awe approach over the coming months but even then there is no guarantee of success."
Although America's central bank, the Federal Reserve, and the Bank of Japan, have undertaken to use these radical policies as well, the Bank has distinguished itself by taking what it considers to be a deeper and further step than any of its counterparts. Nevertheless, there are doubts over how successful the Japanese were with their money creation, while it remains too early to judge the Fed's success.
Barely more than an hour after the Bank's announcement, the European Central Bank cut its own interest rate by half a percentage point to 1.5 per cent and indicated that it will keep cutting borrowing costs and may soon embark on similar unconventional policies.
Tony Dolphin, senior economist at the Institute for Public Policy Research said: "Such a policy has never been tried before in the UK, so it is impossible to gauge the likelihood of its success. But desperate times require desperate measures and with the UK and global economies in the midst of their worst recessions since the War, and in the absence of inflation pressures, it is right that the Monetary Policy Committee is doing everything in its powers to support economic activity."
Charles Goodhart, a former MPC member, said: "We're moving into a new world in the UK from interest- rate adjustment to quantitative easing. It's a great deal more uncertain how things will be done. This month what the MPC says is going to be much more important than what they do."
Mr King pledged that as soon as the policy appears to be effective he will reverse it by selling off the assets and effectively destroying the £150 billion the Bank is creating in the coming months. However, many economists are sceptical that the Bank and Government will be able to resist the temptation to allow inflation to run out of control.