Chancellor George Osborne yesterday said the launch of an £80 billion emergency scheme to kick-start bank lending showed Britain was “not powerless to act” in the face of the eurozone crisis.

Under the scheme, British banks are being offered funding at low interest rates over a four-year period – but it will be directly linked to bank lending performance to encourage lenders to increase loan availability and reduce rates

The Bank of England and Treasury unveiled their “funding for lending” programme in an attempt to ward off a tightening credit squeeze and help drag Britain out of its double dip recession.

The bank painted a grim picture for households and businesses yesterday as it warned that credit availability was falling and borrowing costs rising as the eurozone woes take their toll on the banking sector.

But the funding for lending scheme aims to free up the log jam in credit hitting the economy by offering banks cheap finance on the condition they pass it on to borrowers.

Mr Osborne said: “Today’s announcement aims to make mortgages and loans cheaper and more easily available, providing welcome support to businesses that want to expand and families aspiring to own their home.

He added the initiative would “inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy – showing that we are not powerless to act in the face of the eurozone debt storm”.

Under the scheme, British banks are being offered funding at low interest rates over a four-year period – but it will be directly linked to bank lending performance to encourage lenders to increase loan availability and reduce rates.

For every £1 of additional lending made by a bank, it will be able to access an extra £1 of cheap funding from the scheme. Those that reduce lending will have to pay higher fees to use the scheme.

Bank of England governor Sir Mervyn King said the scheme created “strong incentives” for banks to increase lending.

He added: “The more banks expand lending, the more they can use the scheme. That will encourage banks to make loans to families and businesses both cheaper and more easily available.”

Banks will be able to access finance at rates from around 0.75 per cent including fees – far cheaper than the equivalent 1.25 per cent to 2.5 per cent rate in finance markets.

They will be able to borrow up to five per cent of their existing lending stock which will be increased if they expand net lending over the next 18 months.

The bank will publish a bank-by-bank breakdown of lending each quarter, which will lay bare the success of the scheme.

It is hoped that first-time buyers and small businesses will benefit the most as they have been starved of affordable credit.

Experts have warned there are no guarantees the plans will address the core problem of companies reluctant to borrow or see banks lend more even with the carrot of cheaper funding.

The bank hopes competitive pressure among banks will ease rates and borrowing terms substantially, which in turn would encourage firms to borrow.

The bank made it clear on launching the scheme that it is designed to support the economy and not the banking industry.

The CBI said the scheme should provide a “real incentive” for banks and building societies to increase their lending to businesses and individuals, if possible at lower rates of interest.

CBI director-general John Cridland said: “It is a positive step towards stabilising funding for lending, particularly given the current market turmoil driven by the eurozone crisis.

“I hope this may enable mortgages to be available at a lower rate of interest.”

He added: “Smaller businesses I talk to are concerned with cost of borrowing as well as with its availability. Funding For Lending will help the transition to a ‘new normal’, where structural changes in banking, driven by capital and liquidity reforms, are impacting on business finance.”

Launching the scheme during a visit to crane and hoist manufacturer Street Crane in Chapel-en-le-Frith, Derbyshire, Mr Osborne said: “The British government and the Bank of England are going to support lending to families who want to buy a home with a cheaper mortgage or businesses like this who want to expand and take people on so we are going to lend money to banks on the condition and it’s going to be a very strict condition, that they lend it on to businesses like this.

“So this is huge help, many billions of pounds of help for the British economy because we’ve got lots of problems in the world, problems in the eurozone, the slowing economy in China, lots of problems but the British government can act and will act”.

He added: “What we’re demonstrating today is that the Bank of England and the British Government can work as a team to help lending in our economy that will bring cheaper mortgages for families, cheaper business loans so they can expand and hire people.”

Chris Lindley-Smith, sales director at Street Crane, which employs some 200 people in the Peak District, said: “We were pleased to host the visit of the Chancellor today partly in recognition of our efforts in the global export market.

“The announcement made by the Chancellor today is excellent news for small to medium manufacturing businesses which should have a very strong positive effect on our home market sales.”