The UK economy may recover by the end of this year, while the near term situation is bleak, the Bank of England chief economist Spencer Dale said Friday.

In a speech at the Association of British Insurers Economics and Research Conference in London, Dale said, As we go through 2009, I believe it is most likely that the pace at which output is contracting will ease and that we will see some signs of recovery by around the turn of this year.

The economist's assessment is quite similar to what the central bank mentioned in its February inflation report. The central bank expects the economy to shrink at an annual rate of 4% by the end of the first half of the year.

The economist said his view is based on the substantial stimulus already running in the economy. According to him, near-term prospects for the economy are bleak. He sees further shrinkage in output in the first half of this year on weakening labor markets and concerns over job prospects.

The latest gross domestic product figures released by the Office for National Statistics on Friday showed that the economy shrunk more than earlier thought in the final quarter of 2008. The GDP dropped 1.6% sequentially in the fourth quarter, worse than the 1.5% fall reported earlier.

Dale stressed that the risks to the outlook are weighted to the downside, reflecting the likelihood that stimulus measures could be slow to take effect. So there may still be more to do.

On March 5, the Monetary Policy Committee had voted unanimously to reduce the interest rate by 50 basis points to a historical low of 0.5% and to buy assets worth GBP 75 billion using central bank reserves. To date, the BoE has bought GBP 13 billion of gilts from investors.

The central bank economist noted that the objective of the central bank's operations within corporate credit markets is not to purchase a specific quantity of assets; rather it is to improve the functioning of those markets.

The scale of purchases required to improve market liquidity may in fact be relatively small: the very knowledge that the Bank stands ready to purchase assets may be as beneficial as the actual asset purchases themselves.

Further, the required scale of purchases is likely to diminish over time as liquidity improves and private investors return to the market, Dale said.

According to Dale, it is too early to decide on whether the asset purchase scheme is having its desired effect, though there are encouraging signs. Since the MPC's announcement, yields on gilts have fallen by 40-60 basis points at the horizons at which the Bank is making purchases. This has been accompanied by falls in yields on non-financial corporate bonds of up to around 30 basis points.

Just as policymakers adjusted monetary policy boldly and decisively on the way down in order to meet the target, they will be prepared to respond with equal vigor on the way back up when the time comes, Dale stated.

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