Bank of England Governor Mervyn King said policy makers are prepared to reduce interest rates as low as needed to prevent a recession from fueling deflationary pressures.
Asked whether he would take rates to zero, King said today policy makers “are prepared to cut bank rate to whatever level is necessary” to make sure inflation hits the central bank’s target. The Bank of England’s forecasts, published today, said inflation may slow “well below” their 2 percent goal in 2009.
The pound dropped to a record low against the euro after King today forecast a deepening recession. The bank has already trimmed the benchmark rate twice in the last month, reducing it by 1 1/2 percentage points last week to a five-decade low of 3 percent.
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The downturn has worsened in the past month, reports show. Unemployment rose at the fastest pace in 16 years in October, house prices are falling the most in a quarter century and manufacturing is in its worst recession since the early 1980s. Until last week, the central bank’s benchmark was the highest among the Group of Seven nations.
“Today’s inflation report is a courageous acknowledgment that they are definitely behind the curve and quick action is definitely needed,” said Chiara Corsa, an economist at UniCredit MIB. “Risks of a deflation scenario loom at the horizon.”