Bank of England to warn recession will last far longer than Government's forecast

Bank of England to warn recession will last far longer than Government's forecast
The Bank of England will this week come into direct conflict with the Treasury as it warns on recession.

By Edmund Conway and Angela Monaghan
Last Updated: 12:40PM GMT 09 Feb 2009

In its quarterly Inflation Report, the Bank's Monetary Policy Committee will slash its economic growth forecast to the lowest level since it was granted independence in 1997, and will indicate that it is now poised to start buying up securities directly in a bid to pump extra money into the economy.

It comes after the MPC voted to cut borrowing costs to an all-time low of 1pc, despite warnings from savings groups that such a move would undermine incentives to save money.

The Bank is expected to cut its growth forecast from the already-bearish projection that the economy would shrink by 1.3pc in 2009 made in November, to one which factors in a far steeper decline. It undermines the Treasury's assessment in the pre-Budget report that the economy would start growing again in the second half of the year.

The Inflation Report is the Bank's three-monthly opportunity to indicate its outlook for the economy, and economists will be watching the event closely on Wednesday to determine how much further it will cut borrowing costs.

They expect further rate cuts towards zero, as well as quantitative easing, whereby the Bank would increase the money supply by buying assets like corporate and government bonds, complementing the £50bn Asset Purchase Facility scheme already announced by the Treasury. The Governor, Mervyn King, will also indicate how soon the Bank will embark on this.

Despite better-than-expected data from the services sector last week, more gloom is in store next week in the form of labour market statistics, which could show that unemployment surpassed the two million mark in December.

Figures from the Office for National Statistics are also likely to show the number of people claiming unemployment benefits jumped in January, after a series of high profile failures including Woolworths.

"We are looking for a nasty surge of 110,000, the largest increase since March 1991," said Philip Shaw, economist at Investec. That would take the number of claimants to about 1.27m.

http://www.telegraph.co.uk/finance/financetopics/recession/4561002/Bank-of-England-to-warn-recession-will-last-far-longer-than-Governments-forecast.html