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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 Bank predicts the economy will shrink by 4% from mid-2008 to mid-2009. | |
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. |
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 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 using a new £50bn facility to buy up distressed credit assets. | |
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. |