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Bank says UK 'in deep recession' Bank says UK 'in deep recession'
(41 minutes later)
The governor of the Bank of England, Mervyn King, has warned that the UK is facing a deep recession in 2009 and said further action may be necessary.The governor of the Bank of England, Mervyn King, has warned that the UK is facing a deep recession in 2009 and said further action may be necessary.
In its latest forecast for economic growth and inflation, the Bank says that the UK economy will decline sharply in the first half of the year.In its latest forecast for economic growth and inflation, the Bank says that the UK economy will decline sharply in the first half of the year.
And it says that there is a significant risk that the recession will be even longer and deeper than expected.And it says that there is a significant risk that the recession will be even longer and deeper than expected.
The length and depth of the recession will be dependent on the world economy. The Bank predicts the economy will shrink by 4% from mid-2008 to mid-2009.
Mr King pointed out that since the Bank's last forecast, a severe economic downturn had taken hold around the world. But the length and depth of the recession will be dependent on the world economy, Mr King said.
Trade contracting
The Bank's forecast is noticeably more gloomy than many others, is a particularly sharp revision of its own forecast just three months ago.
Mr King pointed out that since the Bank's last forecast in November, a severe economic downturn had taken hold around the world.
"Growth in the advanced and emerging market economies fell sharply towards the end of last year. And world trade is contracting rapidly," he said."Growth in the advanced and emerging market economies fell sharply towards the end of last year. And world trade is contracting rapidly," he said.
The slowdown could be deeper if "the authorities at home and abroad are only partially successful in improving the availability of credit and restoring business and consumer confidence".The slowdown could be deeper if "the authorities at home and abroad are only partially successful in improving the availability of credit and restoring business and consumer confidence".
The Bank also said that inflation would remain below its 2% target by the end of its two-year forecast period.The Bank also said that inflation would remain below its 2% target by the end of its two-year forecast period.
Policy options New policy options
The Bank of England has already cut interest rates from 5% to 1% in the last five months in a bid to stimulate the economy - and made it clear the Bank was ready to consider more unconventional measures. The Bank of England has already cut interest rates from 5% to 1% in the last five months in a bid to stimulate the economy - and made it clear that it is ready to consider more unconventional measures.
The governor said that the efficiency of further rate cuts was now "somewhat impaired" and hinted that new measures might be introduced soon.
Mr King said that the "Monetary Policy Committee can and will take action to return inflation to the target and so ensure that economic growth will again match its potential".Mr King said that the "Monetary Policy Committee can and will take action to return inflation to the target and so ensure that economic growth will again match its potential".
He indicated that as well as interest rate cuts, the Bank was ready to use a wider group of policy measures to increase the money supply, thus easing conditions in the economy, including buying a new £50bn facility to buy up distressed corporate assets. He indicated that as well as interest rate cuts, the Bank was ready to use a wider group of policy measures to increase the money supply, thus easing conditions in the economy, including using a new £50bn facility to buy up distressed credit assets.
He added that other central banks were taking similar actions and that the common approach would help see the world through the crisis. But he said in the future, the Bank could buy government bonds - or gilts - directly in order to help increase the amount of money in the economy.
In the US, the Federal Reserve has also hinted at taking such action, but appears to have recently pulled back from the direct purchase of US government debt.
But under a plan announced on Tuesday, the US central bank and the Treasury plan to spend up to $1 trillion to buy up distressed consumer credit assets to help boost spending.
Will it work?
Mr King said he was encouraged by the co-ordinated policy responses around the world, but admitted that "the prospects for economic growth remains unusually uncertain, not least because of the extraordinary events of the past few months".
The big problem is how quickly credit markets will return to normal, and whether business and consumer confidence will recover.
Mr King admitted that the further tightening of credit markets had made monetary policy less effective.
And he said that the "collapse of confidence, or 'animal spirits' in Keynes' description, is leading to falls in production and output".
"Restoring both lending and confidence will not be easy and will take time," he added.
In particular, it can take up to 18 months for the economy to respond to changes in monetary policy - even without the credit problems.
But he insisted that the unconventional monetary policy measures were not new, but were tried and tested.