Bank of England Governor Mervyn King says UK economy is in 'deep' recession

The Bank of England Governor Mervyn King has warned that the UK is in 'deep' recession and delivered its clearest signal that it will move beyond cutting interest rates to help revive the economy.

The risks to the economy remain "heavily weighted to the downside," the Bank of England said today in is its gloomiest assessment so far. The speed of deterioration is accelerating, the Bank said in its latest Quarterly Inflation Report, and the economy may shrink by 4pc by the middle of this year. Inflation will drop to 0.5pc at the end of next year, it added.

Governor King also gave a sharp signal that interest rates are heading below 1pc as the Bank steps up efforts to prevent what's already the deepest recession since the early 1980s turning into something worse. The news drove sterling almost two cents lower against the dollar to $1.44, and put it on the back foot against the euro.

The report provides "strong support for our view that rates are heading to zero or very close," said Jonathan Loynes, an economist at the Capital Economics.

Today's assessment comes as the barrage of bad news from most parts of the economy continues. Unemployment reached nearly two million, its highest level for almost 12 years, in January, figures earlier today showed. That comes on top of confirmation last month that the recession is officially the worse since 1980.

The Bank insisted that the weakness in sterling - its down 28pc against the dollar since the start of 2008 - will eventually help pull the economy out of recession. However, Hetha Metal, an economist at the Ernst & Young ITEM Club, doubts the pound will make a powerful impact because overseas demand for British goods will remain weak.

Governor King and the rest of the Monetary Policy Committee have so far reacted to the downturn by aggressively cutting interest rates, the speed of which increased after the collapse of Lehman Brothers in October deepened the crisis and its fall-out on the wider economy.

The Bank today also signaled it will take measures to inject more money into the economy as earlier moves to make money cheaper become redundant. These measures include buying assets such as corporate and Government bonds.