Britain's economy will suffer its worst downturn in decades this year and policymakers around the world will have to consider further monetary and fiscal action, Bank of England Deputy Governor John Gieve said on Friday.
Speaking a week after the BoE cut interest rates to a record low of 1.5 percent, Gieve said action already taken by the authorities was still working its way through and it was possible to overdo the support being given to the economy.
But he expected UK GDP to fall sharply in the fourth quarter of 2008 and the first three months of this year, with further declines beyond that. The main challenge facing policymakers was to prevent a deep and prolonged recession.
"The authorities both here and overseas need to consider whether further action on interest rates (or other monetary measures) or fiscal action is required," Gieve said, according to the text of a speech in Manchester.
"They need also to consider whether to do more to underpin the confidence among banks and among investors that is necessary to support the lending the economy needs to emerge from recession."
Central banks have already slashed interest rates to prop up economic activity and governments have pumped billions of dollars into institutions to prevent a collapse of the global banking system as the financial crisis has gathered momentum.
Britain has stumped up 37 billion pounds ($55 billion) of taxpayers' money to rescue its biggest banks and is expected to announce more measures this month to kick-start lending.
Finance ministry and Bank of England officials are looking into options such as giving banks further capital, relaxing balance sheet regulations and guaranteeing toxic assets held by banks, the Times newspaper reported on Friday.
GLOBAL PROBLEMS
For its part, the BoE has slashed borrowing costs by 350 basis points since October and analysts expect it to keep cutting rates as bad news on the economy piles up. Some even reckon UK interest rates could hit zero, and that policymakers may have to resort to boosting money supply by buying up assets.
Gieve said the global scale of the downturn was compounding Britain's domestic problems by depressing demand for exports.
Official data next Friday are expected to confirm Britain entered a recession for the first time since the early 1990s.
"2009 is certain to be a difficult year for the UK and the global economy more generally," Gieve said. "In the United Kingdom, we expect the sharpest fall in output in decades."
He said widening spare capacity could lead to some measures of retail price inflation turning negative for the first time in almost half a century.
The headline Consumer Price Index, which has been above the Bank of England's 2 percent target for more than a year, may fall well below target this year, he noted.
But he said that while lower interest rates had triggered a sharp fall in the pound — the currency has dropped around 20 percent on a trade-weighted basis in the last year — this could be helpful for the economy.
"No one who has lived through the 70s, 80s and early 90s will be complacent about a fall in sterling," he said.
"But there is no doubt that an appreciable fall in the pound, such as we have seen, has been helpful both in supporting exports and import substitution in the short term and in encouraging the rebalancing of the economy that we need in the medium term."
