Bank of England says UK in 'deep recession'

[February 11, 2009]  LONDON (AP) -- The head of the Bank of England said Wednesday that Britain was in a "deep recession" that would require further easing of monetary policy amid a deteriorating global backdrop.

"The UK economy is in a deep recession," bank Governor Mervyn King said at a news conference, who also gave his clearest sign yet that the Bank of England was ready to in effect print money to get the economy going again.

"The projections...imply that further easing in monetary policy may well be required. That is likely to include actions aimed at increasing the supply of money in order to stimulate nominal spending," King said.

In its quarterly economic projections, the Bank of England said economic growth was not likely to emerge until late 2009.

By then, the sharp fall in borrowing costs, the government's loosening of the purse strings, the big drop in the pound, previous declines in commodity prices and concerted efforts around the world to thaw credit markets should start to bear fruit, it said.

However, in its so-called Inflation Report, the bank warned that it was possible growth may not emerge until much later.

"The risks surrounding the central projection for growth are judged to be weighted heavily to the downside," the Bank of England said.

"This in large part reflects the possibility that, over the forecast period, the authorities at home and abroad are only partially successful in improving the availability of credit and restoring business and consumer confidence," it added.

The central bank said the recession will likely bite hardest in the second quarter of 2009, with gross domestic product likely to contract at an annual rate of 4 percent as the weakening labor market and increased uncertainty weigh on consumption, investment and exports.

The latest projection from the Bank of England showed a far steeper decline than previously anticipated and will likely heap pressure on British finance minister Alistair Darling to further lower his forecasts when he delivers his Budget sometime in the spring.

In November, Darling said the British economy would only contract between 0.75-1.25 percent in 2009.

Official figures have already confirmed that the British economy slid into recession -- two consecutive quarters of negative growth -- during the fourth quarter of 2008, when output contracted by a quarterly 1.5 percent. That was the biggest fall in output since 1980.

The Bank of England also indicated that there was possibility Britain would suffer a bout of deflation -- a corrosive spiral of declining prices -- at the end of 2010, when inflationary pressures are expected to be least.

Its central projection is that inflation will drops well below the 2 official percent target in the coming months -- in December annual CPI inflation stood at 3.1 percent -- as the recession reins in wage demands and cost pressures in the economy.

Since October, the Bank of England has reduced its benchmark interest rate aggressively from 5 percent to a new record low of 1 percent as it tries to breathe life into the ailing economy.

[Associated Press; By PAN PYLAS]

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