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New fears on fate of economy

February 17, 2009

The Bank of England’s Deputy Governor warned yesterday that the recession could be even worse than it suggested less than a week ago.

Charles Bean said that there was “roughly a three in four” chance that the economy would contract by more than the 4 per cent predicted by Mervyn King last Wednesday.

His warning comes amid mounting fears that the UK is heading towards a period of deflation. The retail prices index (RPI) is tipped to fall below zero when figures are published this morning. Mr King admitted last week that the UK was already in a deep recession. His forecast – that economic growth would fall by 4 per cent during 2009 – would amount to the most severe peacetime recession since 1931.

Mr Bean told the National Farmers’ Union annual conference in Birmingham that efforts to restore the banking system “may take longer to bear fruit” and that protectionist measures abroad might slow recovery in Britain.

Lord Mandelson, the Business Secretary, is calling on ministers, MPs and the public to hold their nerve. He will use a speech in New York to say that recovery is a “complex process”, that the Government should ignore the “frenzy” surrounding the issues and not be rushed into judgments. Sources close to Lord Mandelson denied that his remarks were aimed at the Prime Minister, who has been accused of taking too many initiatives.

City analysts expect today’s inflation figures to show that RPI inflation, considered the best gauge of the cost of living because it includes housing costs, fell to -0.1 per cent in January. It is widely tipped to fall to -4.4 per cent later in the year on the back of falling fuel and mortgage costs.

The consumer prices index measure of inflation is also expected to have fallen – from 3.1 per cent in December to 2.6 per cent. Many economists believe that this too will fall into negative territory, tipping the country into full-blown deflation. In the worst-case scenario sketched by the Bank in last week’s quarterly inflation report, the UK economy would contract by up to 6 per cent by mid-year and continuing to decline next year and into 2011.

Mr Bean said that a sharp contraction in the first half of the year was “already baked in the cake”. He also indicated that the Bank was preparing for “quantitative easing” to tackle tumbling inflation, but said that such moves would not bring hyperinflation, as created by corrupt governments elsewhere.

“If the Monetary Policy Committee chooses to finance asset purchases through the issuance of central bank money, it will not be to finance the Government’s budget deficit. Rather, the aim will be to push up the rates of growth of the supply of money and credit,” he said.

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