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Wednesday, 10 December 2008

Britain in for long recession

LONDON - A BANK of England rate-setter warned on Tuesday that the current recession in Britain is likely to be as long and deep as the previous three major postwar downturns in the mid-1970s, early 1980s and early 1990s.

Andrew Sentance, one of the nine-strong monetary policy committee that is tasked with setting the level of official interest rates each month, said it would take time for recent cuts to the benchmark rate to have an effect.

The British central bank has trimmed its key rate by a total of 2.5 percentage points at its past two meetings, bringing the rate down to a 57-year low of 2 per cent as it attempts to minimize the economic slowdown - both the government and the Bank of England have warned that the British economy will contract by over 1 per cent in 2009.

But while the bank has forecast in November that the current downturn will be somewhat less acute than the three major postwar recessions, Mr Sentance noted recent survey data suggest that might not be the case.

'Even if we do see a recovery beginning in the second half of 2009 ... this recession is likely to be comparable in length and depth,' Mr Sentance told a conference on monetary policy and markets in London.

He is widely considered one of the most hawkish on the bank's monetary policy committee, meaning he has typically favored higher borrowing costs relative to other rate-setters.

Mr Sentance said that in the short term the challenge for monetary policy was to counter the impact on demand from the global banking crisis and to head off potential deflationary risks, a sharp turnaround from just a few months ago, when the bank was concerned about inflation being far above its 2 per cent target.

Mr Sentance defended the use of monetary policy against criticism it has become irrelevant because rate changes are not effectively transmitted to the wider economy due to disruptions to the banking system.

'Rather, it gives added force to the argument for a significant relaxation of policy in the short-term, which the MPC has delivered,' he said.

However, he noted that policy makers needed to develop better instruments for maintaining the stability of financial systems in the longer term, while warning against 'heavy-handed regulatory interventions.'

'We need to take time to decide what a new regime for regulating the financial sector looks like,' he added. -- AP

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