MPC member: Sustained downturn more likely

Oct 13 2008

THE current financial crisis has heightened the risk of a severe UK recession, a Bank of England rate-setter warned today.

Monetary Policy Committee (MPC) member Andrew Sentance said it was "more likely than not" the UK would fall into technical recession in the second half of 2008 - two successive quarters of contraction.

But the risks of a harder landing for the economy similar to previous recessions of the mid-1970s, early 1980s and early 1990s have increased in recent weeks, he said.

"Until recently, my view has been that there was a low probability of a severe recession akin to these earlier episodes.

"But the severe stresses in the financial system over the last month and the downside news from the real economy have certainly increased the risks of a bigger and more sustained downturn," he said.

The MPC acted along with central banks around the world last Wednesday to deliver an emergency 0.5% rate cut - the first such move since November 2001 - taking the Bank's official base rate down to 4.5%.

But Mr Sentance, who has been labelled as an MPC "hawk" in the past for his reluctance to lower borrowing costs due to inflation risks, hinted strongly that more rate cuts are on the way as a global recession looms.

He said there was now more confidence the recent inflation surge from rising oil, food and energy costs to more than double the MPC’s 2% target was a temporary phenomenon.

"That shifts the focus for policy action more clearly onto the downside risks for inflation from a prolonged period of weak economic activity," he added.