Bank governor warns of deep recession

Wednesday 11th February 2009

The governor of the Bank of England has warned of the "deep recession" facing the UK as he forecasted an annual contraction in the country's economy of four per cent.

Mervyn King today emphasised the need to increase UK growth rates amid dire warnings of the economy shrinking six per cent this year.

At the launch of the monetary policy committee's Inflation Report, he stated the growth in GDP and the money supply was too low.

"Supply of money is not rising quickly enough," Mr King said. "For decades we had the opposite problem.

"We need to increase growth rates."

The report points to the similar contraction of the economy in 2009 as was experienced in the final quarter of 2008 – but growth is set to return later this year and in 2010.

Although stating he could not be confident in forecasts, Mr King told reporters: "The first point to notice is this downturn is sharper than most other forecasts.

"Risks are skewed to a downturn.

"The reason for the pick up afterwards, the MPC puts weight on stimulus to economy will come through… we haven’t seen the impact of stimulus.

Mr King added: "The banking package will have to work, and if implemented effectively, it will work...

"It will take time."

He added the fall in oil prices and sterling will also help to lead the economy out of recession. However, Mr King warned of the dangers of international protectionism that could stop recovery and stated "many outcomes" were possible.

The MPC predicts the consumer prices index (CPI) – which the Bank must hold at two per cent – will fall to below one per cent in 2010 and remain there into 2011.

However, there is a risk of CPI heading negative.

Interest rates have now fallen to one per cent – from five per cent in autumn last year – hitting millions of savers.

Mr King stated he had "every sympathy" with savers.

"If we put up rates, it would benefit savers in short-term. But no one is arguing it will aid the economy," the Bank of England governor said.

"We must take actions… to dampen the strength of the downturn."

The governor explained while re-balancing in the economy to more saving and less consumption was needed in the long-term; the paradox was more spending was needed.

Mr King also responded to call for him to apologise for not preparing the UK economy fully for the recession.

"Since autumn we have acted in a strong and vigorous way. We are prepared for stronger action.

"Forecasting can never be an exercise that we are going to get right. Shocks will come that will hit that no-one can easily forecast.

"I don't except the premise [we got it wrong]. For ten years we did the right thing.

"We said the economy needed to slow."

He added: "Back in August, the central forecast was for a decline in GDP – that was in our forecast.

"When the world economy changed after the events of Lehman Brothers, and the complete collapse in confidence that followed, it was not something reasonable to anticipate in first half of 2008."

Mr King also stated there were reasons to be cheerful.

"It is foolish to pretend the situation is not serious. To cheer people up, we have a policy framework to get us out of this; that will work."

He added monetary economics and financial history show if a central bank increases the supply of money, inflation will rise and the economy will grow again.

"We can't do it overnight and there have to be adjustments, that we can't and should not avoid.

"But we will come through it and we will have growth again.

"Today's problem is making sure spending will grow quickly enough to get us through recession."

He added "one way or another" the government must ensure banks start lending again.

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