'Deep recession' puts zero rates in prospect

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King today admitted that Britain is in a "deep recession" and said there is little chance of a return to growth until the end of next year at the earliest.

That led to forecasts that, having already cut rates from 5.25% this time last year to just 1% now, he is preparing the ground to slash the cost of borrowing again.

King also gave the clearest sign yet that the Bank is ready to print money in a bid to kick-start the economy. Presenting the Bank's quarterly economic projections, he said there is little chance of a return to growth until the end of next year at the earliest.

Howard Archer at Global Insight said: "The report and Mr King's comments reinforce our belief that interest rates will be cut again in March, and will come down to a low of 0.25% in the second quarter. Indeed, it seems very possible that interest rates could come all the way down to zero.

"While King sympathised with the hit that savers are taking from very low interest rates, it is clear the MPC takes the view that lower interest rates are beneficial overall to the economy."

Tony Dolphin, senior economist at the Institute for Public Policy Research said: "Although it is too early to say whether cuts in interest rates are having an effect on the economy, the downside risks to the outlook mean that alternative measures - often described as quantitative easing - now need to be urgently considered."

The Bank warned the recession could last well into 2010. This will put further pressure on the Chancellor to lower his November forecast that GDP will fall by between 0.75% and 1.25% in 2009.

James Knightley at ING Bank said: "Further aggressive stimulus is in the offing. We look for the BoE to cut rates again in March to 0.5%, with a very real likelihood that they will follow the Federal Reserve with the policy rate left close to zero.

"It also seems probable the Bank's Asset Purchase Facility, which will come into operation next week with up to £50 billion purchases of assets, mainly consisting of commercial paper and corporate bonds, will be expanded."