The recession is proving to be deeper than the Bank of England expected when it previous produced an inflation report in May.

That in part explains the extension of the quantitative easing programme that rather surprised many commentators.

I have cut and pasted below some words of Bank of England Governor, Merveyn King, on growth prospects, taken from his opening remarks at the press conference on the latest Inflation Report.

“Activity in the UK economy has continued to fall. The level of GDP is around 6% below its peak, and manufacturing output is more than 10% down on a year ago. Unemployment continues to rise. The recession appears deeper than the MPC thought likely at the time of the May Report. But, as the impact of de-stocking has turned round and the effects of a lower exchange rate and the policy stimulus have begun to come through, the pace of contraction has moderated. It is likely that output stabilised in the middle of this year, and business surveys and other short-run indicators suggest that growth is more likely than not to resume over the next few quarters.

“Nevertheless, given the depth of the recession, to erode the margin of spare capacity that has been created will require an extended period of robust growth. And the sustainability and strength of any recovery will be affected by necessary balance sheet adjustments of the banking, household and public sectors. Recovery could be slow and protracted.”

And his words on inflation.

“In the short run, inflation is likely to be volatile, at first falling quickly as the impact of last year’s sharp increases in energy prices drop out of the twelve-month comparison, before rising sharply as last year’s VAT cut is reversed. It is more likely than not that later this year I will need to write a letter to the Chancellor to explain why inflation has fallen more than one percentage point below the target. In the medium term, inflation is likely to remain low as the margin of spare capacity that is likely to persist over the forecast period continues to push down on CPI inflation. That is partially offset by the upward pressure associated with the passthrough of sterling’s past depreciation to consumer prices. The relative magnitude of these opposing influences on inflation is again highly uncertain, but on balance the Committee judges that, with Bank Rate following the market yield curve and a stock of asset purchases of £175 billion, inflation is more likely to be below the target than above it in the medium term.”

It was particularly encouraging to here Mr King’s words to the banking sector. He made clear that it was, in his view, their crisis that has led to the recession in the economy at large and he hoped sincerely that they did not think that it was “business as usual” after the efforts made to support the banking system.

Anyway, it is worth downloading the full Inflation Report which has the Bank’s view on economic prospects.