``We are certainly prepared to cut bank rate if that proves to be necessary'' to hit the central bank's 2 percent inflation target, said King at a press conference in London. He indicated the central bank would be prepared to push its benchmark to zero if necessary.
Inflation will fall ``well below'' the bank's goal from the middle of 2009 and gross domestic product will contract by an annual 1.8 percent in the first three months of the year, forecasts by the Bank of England released today in London show. The predictions are based on market expectations of the interest rate just above the current 3 percent in the next quarter, reported Bloomberg .
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The pound fell to a record low against the euro after the report as the prospect of a deepening recession and lower rates led investors to sell the currency. The Bank of England cut its benchmark interest rate by 1.5 percentage points on Nov. 6 to the lowest since 1955. Today's forecasts suggest that won't be enough to bring inflation back to the target.
When asked whether the central bank would cut its key rate to zero, King said policy makers ``are prepared to cut bank rate to whatever level is necessary'' to make sure inflation hits its target.
The pound dropped to 82.13 pence per euro, extending its decline this year to 10 percent. Against the dollar, it dropped to the lowest since August 2002, falling to $1.5254 and has lost a quarter of its value since January.
The Bank of England's forecasts show the U.K. economy will contract through 2009 and inflation will slow below the government's 1 percent minimum unless it cuts rates further.
Slowing growth and falling commodity prices are sparking concerns that inflation could give way to deflationary pressures. U.K. manufacturers' raw material costs and output prices fell at the fastest pace in 22 years in October, the Office for National Statistics said Nov. 10.
The Bank of England presents its forecasts as fan charts and won't give exact numbers until next week.
King, fielding criticism that he underestimated the risks facing the economy, said ``the world has changed'' since the collapse of Lehman Brothers Holdings Inc. in September.
``We have seen the biggest banking crisis since the outbreak for the First World War and arguably even bigger than that,'' he said. The forecast revisions are the largest the Bank of England has made since gaining rate-setting authority in 1997.