The economic recession gripping Britain is likely to be as long and deep as the previous three major post-war downturns, Bank of England (BoE) policymaker Andrew Sentance said on Tuesday.
Speaking at a monetary policy and markets conference in London, Sentance said the BoE remained focused on countering the economic fallout from the global financial crisis and heading off the risk of deflation.
It had already delivered a significant easing of monetary policy, but this would take time to have an effect, he added.
"Even if we do see a recovery beginning in the second half of 2009 — as suggested by the Bank's November Inflation Report forecast — this recession is likely to be comparable in length and depth with the previous three major post-war UK downturns in the mid-70s, early-80s and early-90s," Sentance said.
The BoE last week cut interest rates by one percentage point to 2 percent, their lowest level since 1951 and indicated more needed to be done to lessen the impact of the economic downturn.
The BoE's November Inflation Report forecast a recession slightly less deep than the three major post-war UK downturns.
"However, recent survey data have been weaker than that forecast implied and so I now expect the recession to be of comparable depth to those previous downturns," Sentance said.
Earlier on Tuesday, official data showed a big fall in UK factory output in October, while surveys showed retail sales sliding and property sales at a record low. [ID:nL9702067]
Sentance said the short-term challenge for monetary policy was to counter the impact on demand from the global banking crisis and "to head off the potential deflationary risks created by an emerging large margin of spare capacity (in the economy)."
In the longer term, policymakers needed to develop better instruments for maintaining the stability of financial systems.
Monetary policy cannot do this unaided, Sentance said, but he also warned against "heavy-handed regulatory interventions".
"We need to take time to decide what a new regime for regulating the financial sector looks like," he said.
Sentance said the BoE had made bold decisions, such as its 150-basis-point cut in interest rates last month.
"The 150 basis point cut in November changed the goalposts of perceptions of the measures the Monetary Policy Council would take," he said.
But he added it would take time for rate cuts to work.
"There is a need to allow a reasonable amount of time to see policy measures take impact," he said. "It takes several quarters for the real side of the economy to respond."
