Bank Of England Warns Recession Is Looming

The Bank of England has warned of a deepening risk of a double-dip recession in the UK next year.

In a gloomy forecast for the economy, governor Mervyn King again downgraded the UK's GDP growth expectations to 1% both this year and next - down from 1.5% and 2.2% respectively.

He said external factors were putting an "unwelcome drag" on the country, with the lack of a credible plan to tackle the eurozone crisis being the biggest risk to prospective growth.

At the launch of the bank's Inflation Report, Sir Mervyn said the economy would be be broadly flat until the middle of next year - hit by the global slowdown and financial squeeze.

The report, compiled by the Monetary Policy Committee, read: "Implementation of a credible and effective policy response in the euro area would help to reduce uncertainty and so support UK growth."

It continued: "Its absence poses the single biggest risk to domestic recovery."

The downbeat predictions for the UK economy support the widely held view that the base rate of interest will be kept on hold for the foreseeable future - possibly through 2012.

Analysts also believe they make it more likely that the bank will add another £75bn to its quantitative easing (QE) programme by February.

That would take the total bill for asset purchases, as the governor prefers to call QE, to £350bn as the bank looks to boost money supply in the economy.

There was better news for households - with the bank forecasting that the downgraded prospects for the UK economy would hit inflation more quickly than originally estimated.

Sir Mervyn King saw the headline measure falling back to the Government's 2% target in the second half of next year before falling to as low as around 1.3% in 2013.

He also predicted that real take-home pay - which has lagged so far behind inflation for three years creating a squeeze on household budgets - would fall back in line.