Bank of England governor says UK economy “very likely” in recession

London: Reversing an August forecast that painted a ''broadly flat'' picture of the economy, Mervyn King, governor, Bank of England, yesterday admitted it was "...very likely that the UK economy entered a recession in the second half of this year." He also pledged to move bank rates to "...whatever level is necessary" in order to avoid deflation.

Admitting that confidence had been "shaken badly" by the banking crisis King said inflation was expected to drop to 1 per cent next year. He also said unemployment could hit almost two million by Christmas and likely reach three million by 2010.

Raising the possibility of further rate cuts, King made it clear that the Bank's previous concern in keeping inflation in check had now been cast aside. The focus, instead, would be on keeping the UK from sliding into a Japanese-style deflationary spiral.

Market analysts said interest rates, now down to 3 per cent, would almost certainly come down much lower. Some even project a full point cut in December itself.

If this should transpire then it would it would be the lowest level since the Bank was given its royal charter in 1694.

Presenting the changed economic outlook, the Bank denied it was "behind the curve" in not cutting rates sooner and presented three reasons for its altered forecast. These, according to the governor, were the very sharp downturn in confidence and orders, the ''extraordinary'' banking crisis, which the Governor said was the worst in a century, and the plunge in commodity prices.