Inflation to dip below 2% target as BoE warns of prolonged recession
In its quarterly inflation report, the Bank of England warned that the UK is heading for a prolonged recession.
According to the Bank’s Governor, Mervyn King, it is very likely that the UK economy entered a recession in the second half of this year, and added that it is difficult to know precisely how long it will last.
Furthermore, inflation is expected to fall to 1% by 2010, well below its 2% target. In September, inflation reached a 16-year high of 5.2%.
As a result of a prolonged recession, Mr King said the Bank is prepared to cut interest rates further. Many economists believe interest rates could hit a record low of 1% next year – the lowest rate since the Bank was established in 1694.
Last week, the Bank slashed UK interest rates from 4.5% to 3% – a much more significant reduction than the market had expected.
Mr King added that these are ‘exceptional and difficult times’ and the Monetary Policy Committee will take the necessary action to prevent a period of falling prices.
The Bank believes that the UK economy could contract by 2% during next year, far worse than previous predictions.
However, Mr King said we will come out of recession and get back to a period of low and steady inflation and economic growth.
The Bank’s report and Mr King’s comments come after figures from the Office for National Statistics (ONS) revealed that UK unemployment is at an 11-year high.
Furthermore, the Governor’s comments led to a sharp fall in the pound, which is below the $1.50 level – its lowest against the dollar for over 6 years. The pound also fell to a record low against the euro of 83.84.
In related news, figures today from the Federal Statistics Office have revealed that Germany, Europe’s largest economy, is now in recession.