The Bank's latest gloomy forecasts predict the economy could contract year-on-year by two per cent in early 2009 unless rates fall further.
The forecasts showed inflation undershooting the Bank's two per cent target by more than one per cent if rates remain at three per cent, supporting expectations that borrowing costs will plunge below the all-time low of two per cent .
Bank governor Mervyn King gave a stark warning of the difficulties ahead for the UK economy and said "the world had changed" in the wake of the global banking crisis triggered by the collapse of Lehman Brothers.
"We are prepared when the world changes to make big changes to bank rate in response," Mr King added.
Interest rates are at a 53-year low after the Bank's biggest cut since 1981 last week. Rates have been lowered by two per cent since September.
Asked if interest rates could fall all the way to zero, Mr King said the Bank would set rates at "whatever level is necessary" to restore inflation back to its two per cent target.
Answering accusations that the Bank's Monetary Policy Committee had been too slow to act to cut rates, Mr King defended the current framework, saying: "I think it's worked well and I think it will continue to work well."
He added: "It is always possible to set policy with the benefit of hindsight ... there is no way in which the committee can have perfect foresight."
Based on market expectations of rates before last week's dramatic move, its forecasts show inflation falling from a current record of 5.2 per cent to less than half its two per cent target as food and energy prices fall back and demand eases in a looming slowdown. The MPC predicts a 10 per cent fall in energy prices in early 2009 after two rounds of hikes this year.
"We are moving into very difficult times and people should be concerned that we are moving into very difficult times, but that isn't to say we won't get through it," Mr King added.
The Bank's predictions are the first since the global financial crisis sent the UK teetering towards recession.
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Jay B, oldham (12/11/2008 at 17:10)
the problem is far too many things are just too expensive!
and that fact we're taxed far too much means we have very little left to spend.
that and the fact there is now no momey around to spend means businesses arent selling their products and driving them to cut backs and even closure!
the government has sat back far too long and let things get to this point. now they're going to try and solve it and make themselves look good.
but unfortunately i think its gone past the point of no return!
now they'll continue to ruin the economy as they might as well leave it in a dire state for the next lot when they come in.