Bank of England: Recession is on the way back

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Governor Mervyn King said a dreaded "double dip" was possible. He said: "I don't think we are out of the woods by any means."

The grim outlook suggested that interest rates will not start to rise until late this year or early 2011 — good news for borrowers but bad news for savers.

It was the first time that the Bank of England has issued such a stark warning since the recession officially ended last year. Gross domestic product grew by just 0.1 per cent in the fourth quarter of 2009. The figure marked the end of the recession after six quarters of contraction but was so weak that it triggered fears of a relapse this year.

Another fall in GDP would be a major blow to Gordon Brown, who is pinning election hopes on his handling of the recovery. GDP figures for the first quarter will be published on 23 April, two weeks before a possible poll on 6 May.

Former Bank of England member Charles Goodhart said: "There is a fear that the first quarter figure could actually be negative. That would be remarkably damaging to the Labour government." Mr King admitted that the economy will not recover as fast as the Bank of England expected three months ago.

He said: "The UK economy has continued to bump along the bottom, but a gradual recovery in output may now be in prospect." The Bank also forecast inflation will peak at about 3.5 per cent early this year before falling back to below two per cent.

Economists said rates will stay at 0.5 per cent for some time. Howard Archer of IHS Global Insight said: "Interest rate hikes are clearly off the agenda and could very well be delayed until 2011."

Mr King said Britain was far more secure financially than debt-ridden Greece despite concerns over the UK deficit. "I don't think you can compare the UK with Greece," he said.

In Athens, police fought protesters as public sector workers went on strike against government moves to tackle the country's budget deficit.