Bank of England governor says Britain in 'deep recession,' money supply may need to be eased
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, including expanding the money supply.
"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 to stimulate nominal spending," King said.
The Bank of England is due to begin buying some financial assets this week as part of a 50 billion pound asset purchase facility authorized by the government. Because the new facility will be financed by the issue of government debt, the money supply will not be increasing.
But King said additional purchases of government bonds outside the asset purchase facility were likely as the Bank of England looks to "top up" the money supply, which was growing very slowly. Expanding the money supply could help inflation rise back towards the 2 percent target and boost the output in the economy, King said. "This will work eventually," said King.
In its quarterly economic projections, the Bank of England said economic growth was not likely to emerge until late 2009 when the sharp fall in borrowing costs, the government's loosening of the purse strings, big drops in the pound and commodity prices and efforts around the world to thaw credit markets should start to bear fruit.
However, the bank also 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 increased uncertainty weighs on consumption, investment and exports, and the labor market continues to weaken -- the weakening labor market -- figures earlier showed unemployment in the three months to December rising to 6.3 percent from 5.9 percent in the previous three month period.
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. King conceded that one of the paradoxes of slashing interest rates was that savers -- particularly the elderly who often make ends meet by the interest payments on their deposits -- were being hit hard even though they had nothing to do with the credit boom and the financial crisis.
"I have every sympathy with savers. They were clearly one group that did not cause any of the problems," said King. However, King said savers would have been hit harder if interest rates had not been cut sharply because the recession would have been deeper and unemployment higher.
King also refused to take any blame for the recession or the near collapse of the banking system and dismissed suggestions that the Bank of England's forecasting model was at fault for not projecting the turn of events in 2008.
Again, he said it was the collapse of confidence after the collapse of U.S. investment house Lehman Brothers last September that triggered the change in economic fortunes.
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