The Bank of England is poised to cut interest rates again this week, but Governor Mervyn King is running out of bullets in the fight against recession. Rates have been slashed from 5% to a 315-year low of 1.5% since October, and the City is expecting another cut to 1% on Thursday.

But with the official cost of borrowing rapidly approaching zero, and the economic storm clouds getting darker, attention is now turning to what else policymakers can do to stave off deflation and stop recession turning into depression.

And that means quantitative easing - printing money - is back on the agenda.

In an exchange of letters last week, Bank Governor King and Chancellor Alistair Darling agreed details of the so-called Asset Purchase Facility.

The £50 billion scheme aims to thaw the frozen credit markets by allowing the Bank to purchase companies' debt with Treasury bills, freeing up funds so banks can lend.

It is not traditional quantitative easing as it is financed by Government bonds, and not a fresh supply of money from the Bank, but under the agreement this could follow should King request it and Darling sanction it.

There can be little doubt that with the framework for quantitative easing in place, it will soon be used, particularly given the pace of decline in the economy.

Inflation may be well above the 2% target at 3.1% but it is sharply down from its peak of 5.2% and looks set to tumble below 1% in the coming months, with a bout of deflation a real possibility. Meanwhile, the economic news goes from bad to worse. When the Bank's rate-setters on the monetary policy committee met in January, the latest GDP figures showed third-quarter contraction of 0.6%, unemployment was 1.79 million and Nationwide house price figures were down 15.9%.

The MPC now knows the economy shrank 1.5% in the fourth quarter, unemployment is up to 1.92 million (even before the collapse of Woolworths and mass redundancies since New Year), and house prices are down 16.6%.

Furthermore, the International Monetary Fund reckons economic output in the UK will fall 2.8% this year and suffer a worse recession than any other industrialised nation.

Against this backdrop, the MPC must and will act. But the pace of rate cuts has slowed the closer to zero the Bank gets. After cutting rates by 150 basis points from 4.5% to 3% in November, and 100 basis points to 2% in December, the committee last month cut by "just" 50 basis points to 1.5%.

"As the MPC brings interest rates down to levels never seen before, it probably makes sense for it to tread gingerly," says Vicky Redwood at consultancy Capital Economics.

The market is expecting another 50-basis-point cut to 1% this week, and the MPC seems in no mood to shock. In the minutes of the January meeting, the committee warned "implementing a larger-than-expected cut could damage confidence further in both financial markets and the real economy".

The minutes also noted that previous rate cuts, the bailout of the banks, the lower rate of VAT and the fall in sterling "amounted to a very significant stimulus to demand, the effects from which were only beginning to work through the economy".

In fact, the committee even thought that there was a "reasonable" case for leaving interest rates unchanged, particularly given sterling's weakness. It is worth noting the US Federal Reserve paused for breath at 1% for a few months before moving to near-zero, and some argue this month may be time to pause.

But Philip Shaw of Investec said: "The intensity of the current downturn, in particular the 1.5% drop in GDP, leaves little doubt in our minds that interest rates will continue to come down again.

That said, the risk remains that credit flows in the economy continue to dry up. In such case, it is easy to envisage rates falling close to zero and the MPC requesting the mandate from the Chancellor to provide further stimulus via quantitative easing."

It is the collapse in lending to households and businesses that underpins the sharpest contraction in economic activity since 1980, and leaves Britain facing the deepest recession of the major nations. Vital to economic recovery is to get banks lending again. While this is a priority, the Bank must also prevent deflation. Interest rates alone look unlikely to do that, which means a new era of "unconventional" monetary policy - purchasing assets rather than simply changing rates.

What form that takes remains to be seen, hence King's Donald Rumsfeld-style observation that there were both "conventional unconventional" and "unconventional unconventional" measures.

While printing money runs the risk of higher inflation - as seen in the extreme in pre-war Germany and current day Zimbabwe - the greater risk may be that too little quantitative easing takes place, prolonging recession. But whatever Threadneedle Street, and indeed Downing Street, decide, there will be no silver bullet.