The Bank of England has said the recession-hit British economy is set to shrink by 4% in the middle of this year compared with a year earlier.
The bank's quarterly forecast said that the UK economy would return to growth in early 2010.
It also gave its clearest signal yet that it would need to resort to unconventional measures to fight deflation.
The bank said UK inflation would fall to as low as 0.5% - far below its 2% target - should rates be kept at their current 1% level.
But the BoE said the impact of its rate cuts was being 'blunted' by the credit crunch and warned that, while rates had not yet reached zero, any further cuts might have minimal impact on the economy.
