Mervyn King said 2008 had seen the worst banking crisis since WW1
The British economy will shrink sharply next year and inflation could fall to just below 1% in two years.
In its gloomiest set of forecasts in more than a decade, the Bank of England said the British economy was probably already in recession and was likely to contract further next year.
Governor Mervyn King said that the Bank was ready to cut UK interest rates still further if necessary. He said 2009 would be a "difficult" year, but that lower rates should help the economy recover.
He warned that inflation could fall below the government's target of 2% by the end of next year.
Since the August Report, the economic landscape has changed. As a result, the downward revision to the inflation outlook in today's report is the largest in any one quarter since the Monetary Policy Committee was set up.
It's very likely that [...] inflation will go negative next year but that reflects more the fact that we cut interest rates significantly during the course of this year.
The prospect for [...] inflation is that it will return to the 2% target in the medium term. It will take time to get it back there, but we will do that in the medium term.
UK ECONOMY IN RECESSION
It's very difficult to know how long we'll be in recession. I think we probably are in recession now - 2009 is going to be a difficult year.
Following the failure of Lehman Brothers - the most serious banking crisis since the outbreak of World War I reduced the supply of credit to the real economy - and in some cases led to a cessation of lending altogether.
Confidence has been badly affected. All this will restrain demand looking into next year.
In the space of a few months, we have gone from the highest rate of manufacturing input price inflation in nearly 30 years to the lowest monthly rate on record.
FURTHER INTEREST RATE CUTS
Central banks around the world cut interest rates in a co-ordinated move in early October, and the Monetary Policy Committee cut Bank Rate again last week.
We are certainly prepared to cut Bank rate again if that proves to be necessary. There are many things to learn between now and our next meeting.
Further ahead, domestic demand should gradually start to recover as the impact of lower rates, the effects of the bank re-capitalisation programme on credit availability, and some recovery in real take-home pay take hold.
And that, together with the pick-up in exports, following the fall in sterling's effective exchange rate, should support a recovery in output growth.