Bank of England Cuts Rates; Brown Cites Global “Depression”

Fighting an ever-worsening recession in the United Kingdom, the Bank of England lowered its benchmark interest rate to 1 percent—marking another record low for interest rates in the central bank’s history.

According to a Bloomberg report:

The U.K. economy will shrink the most since 1946 this year and faster than any other industrialized country, International Monetary Fund forecasts show. Prime Minister Gordon Brown’s government has given the central bank powers to spend up to 50 billion pounds ($73 billion) on bonds and commercial paper as interest rates lose their potency to aid economic growth.

“The global economy is in the throes of a severe and synchronized downturn,” the central bank said in a statement. “Business and household sentiment in many countries has deteriorated. The supply of credit remains constrained.”

The report further noted:

Brown said yesterday that the world is suffering a “depression,” suggesting he may increase measures to stimulate the economy. The government has already pledged hundred of billions of pounds to prop up banks, and the pound has fallen 26 percent against the dollar and 16 percent against the euro in the past year, making British exports cheaper.

While a recession is generally regarded as two consecutive quarters of economic decline, a depression is typically defined as six consecutive quarters of economic decline.

Will the world economy decline throughout 2009?  It depends on whose numbers you believe.  The IMF forecasts global growth of 0.5 percent this year and bank losses from toxic U.S.- originated assets of $2.2 trillion. By contrast, Nouriel Roubini sees the global economy shrinking this year, and banks writing down at least $3.6 trillion — compared to the $1.1 trillion disclosed so far.

While the U.S. government is resisting nationalizing its biggest banks, Roubini says it will have no choice because they are now “effectively insolvent.” And the outcome may be even worse than even he anticipates if governments fail to take aggressive steps to recapitalize banks and revive their economies, he says: “The risk of a near-depression shouldn’t be underestimated.”

Roubini, who’s now working on a book about the crisis, says he takes no particular pleasure in his role as Dr. Doom or the attention it brings him.

“I’m not a permanent bear,” he says. “I’ll be the first to call a recovery, but I just don’t see it yet, and it’s getting uglier.”

In this environment one must continue to invest carefully.