'Quantitative easing' on the cards, warns Bank

Bank of England boss Mervyn King said today that the UK was in "deep recession" and warned policymakers may imminently resort to other rescue measures as interest rate cuts lose their impact.

In its latest quarterly forecast, the Bank made a dramatic downward revision to its growth forecast - predicting that the economy could shrink by as much as 4 per cent in the summer and remain in recession for the bulk of 2009.

The UK is also likely to avoid deflation only narrowly, with the Consumer Prices Index (CPI) set to fall to as low as 0.5 per cent and remain far below the Bank's 2 per cent target until 2012, according to the report.

Mr King indicated rates could fall again from the already historic low of 1 per cent but said cuts were already becoming less effective - preparing the way for so-called quantitative easing tactics, where the supply of money in the economy is increased.

"Bank rate doesn't have to go to zero," he said.

"We are now at the range where it doesn't make a great deal of difference where the Bank rate is - we are at the point where we need to think about taking other sorts of action," he said.

Today's forecast is far worse than the Bank's outlook in its November report and comes as unemployment figures also revealed the number of jobless was at a 10-year high of just under two million.

The Bank predicted output plunging sharply this quarter and next, falling as much as 4 per cent year-on-year before sharply recovering in 2010.

But the Bank cautioned the risks were heavily skewed to the downside.

"The prospects for economic growth and inflation remain unusually uncertain, not least because of the extraordinary events of the past few months," Mr King said.

"The Committee judges that the balance of risks to the path for GDP is very much to the downside, reflecting in large part uncertainty about when lending and confidence will recover."

Asked about Mr King's comments, Gordon Brown's spokesman told reporters at a daily Westminster briefing: "The Prime Minister's view is that we have an independent Bank of England that produces independent forecasts and we will update our forecasts at the time of the Budget."

This Friday, the Bank is launching the initial phase of a £50bn asset purchase facility, which was first announced alongside the Government's second bank bail-out last month in a bid to get banks lending again.

Mr King said the economy had yet to see any beneficial effects from the economic stimulus measures taken so far.

He added that repairing the impact of the credit crunch on bank lending as well as restoring a collapse in confidence "will not be easy and will take time".

But he sought to reassure that steps being taken would eventually start to help.

"We have a policy framework which is capable of getting us out of this and these measures will work," he said.

With the prospect of even lower rates, Mr King also moved to reassure savers that they were not being abandoned in the Bank's effort to see off deflation and boost the economy.

"I'm in immense sympathy for them, because savers are clearly the one group that did not cause any of the problems we are facing now," Mr King said.

"If we were not to take these measures, then the savers would find themselves even more worse off, with higher unemployment and even more of a downturn in the economy."

The Bank is also hoping the weakening pound will help provide a boost to the economy and act as a tool to fight deflation as prices are hiked to cope with higher import costs.

Economist Howard Archer of IHS Global Insight said: "More Bank of England action to stimulate the economy is on the way, both through a further trimming of interest rates and through the increasing adoption of other measures.

"It is also clear that the Bank feels that interest rates near, or even at, zero will be insufficient to stimulate recovery given that credit conditions remain cripplingly tight for the economy."