BoE issues gloomy assessment of UK economy

In its latest Quarterly Inflation Report, the Bank of England has issued its gloomiest assessment for the UK economy so far.

The Bank warned that the UK is “in a deep recession” and forecast that the economy may contract by 4% from mid-2008 to mid-2009.

The Bank’s Governor, Mervyn King, said rate cuts may no longer work and is forecasting a severe drop in inflation.

Figures from the Office for National Statistics (ONS) last month revealed that inflation fell in December to an annual rate of 3.1% from 4.1% in November. However, this figure is still above the Bank’s 2% target but Mr King said that the “Monetary Policy Committee can and will take action to return inflation to the target and so ensure that economic growth will again match its potential”.

With regard to interest rate cuts, Mr King hinted that “unconventional measures” may have to be introduced to boost the amount of money in the economy.

The Bank of England has reacted to the downturn by aggressively cutting interest rates. Since October, rates have been lowered from 5% to 1% currently.

Many economists believe that ‘quantitative easing‘ could be implemented, whereby the Treasury would inject funds into the financial system and ease pressure on banks by giving them extra capital.

However, Mr King believes there is a need for urgent co-ordinated action on a global scale to help the recovery.

The gloomy assessment comes on the same day that the ONS revealed that UK employment soared to 1.971 million between October and December - the highest level in over a decade.

The ONS now shows the UK’s unemployment rate to be 6.3%, up from 6.1% the previous month.

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