The Bank of England’s Governor admitted yesterday that Britain is now in “deep recession” and signalled that it is ready to start “printing money” as soon as next month in aggressive, last-ditch moves to limit the slump.

Mervyn King indicated that the Bank is poised to move beyond relying on further interest rate cuts to combat recession. It will give a green light within weeks to a strategy of “quantitative easing”, the modern equivalent of printing money, he made clear.

The Governor’s strong hints that the Bank will shortly embark on this radical action to breathe life into the stalled economy came as he unveiled its bleakest assessment yet of Britain’s prospects.

The Bank ripped up already grim forecasts issued only last November to predict that the economy will shrink at an annual rate of as much as 4 per cent during this summer — more than twice as fast as it had expected just three months ago.

Mr King warned that the odds are now heavily tilted towards an even more brutal decline in the economy than the Bank is now factoring on. On the Bank’s new worst-case scenarios, the pace of the slump could accelerate to see GDP shrinking at an annual pace of up to a staggering 6 per cent.

“The economy is in a deep recession,” the Governor said. “But the length and depth of the recession will depend to a significant extent on developments in the rest of the world, where a severe economic downturn has taken hold.”

The Bank’s gloom-laden forecasts left the City betting that it will order quantitative easing moves to begin at its next meeting in just three weeks’ time.

As well as the startling scale of the slump in national output predicted yesterday, the Bank emphasised the case for drastic action with a forecast that Britain will flirt with sustained deflation for most of the next three years.

Consumer price inflation is set to plummet far below the Bank’s 2 per cent target and drop as low as 0.5 per cent in the next few months, it predicted. Apart from a brief blip upward in 2010 as this year’s steep decline in fuel prices drops out of the figures, consumer price inflation is tipped to remain under 1 per cent until 2012.

With the Bank highlighting the danger of a still weaker economy, and Britain already on the brink of a destructive bout of deflation, economists said it was clear that action would be required beyond further cuts in interest rates that are already at historic lows of just 1 per cent.

Mr King made clear that the Bank is now ready to buy up government debt, in the form of gilt-edged stocks or gilts, as part of the imminent quantitative easing. Until now, it was thought that this strategy would first focus on buying assets from banks to stimulate new lending and help to cut loan costs for businesses and consumers.

The Bank will take the first steps down that road tomorrow with purchases of some corporate debt. This will not yet amount to quantitative easing, however, as the move is being funded by the Treasury, rather than by the Bank itself creating money.

Mr King refused suggestions that he should apologise for the state of the economy and insisted the present crisis could not have been foreseen. “It’s not sensible for anyone to pretend that they can forecast the future when unexpected events occur,” he said.

The Governor also sought to reassure savers hit by plunging interest rates that he was aware of their plight. “I’m in immense sympathy for them,” he said. But he insisted that savers would end up “even more worse off” if action was not taken to bolster the economy.

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