Feb. 20 (Bloomberg) -- Bank of England Deputy Governor John Gieve said policy makers are trying to protect Britain from the threat of a decade-long slump similar to that experienced by Japan in the 1990s.

“Do we face a ten-year depression like Japan? That is a risk, and a risk that we and other policy makers are taking very seriously,” he said late yesterday after a speech at the London School of Economics. “It’s a serious risk but we are addressing it. There’s a huge amount of policy easing in the pipeline. I don’t think it’s inevitable.”

The Bank of England this month cut the benchmark interest rate to 1 percent, the lowest ever, and sought permission from the government to buy securities to create money. Policy makers are trying to avoid the fate of Japan in the 1990s, when policy makers hesitated before tackling a banking crisis and then struggled to revive economic growth, leading to a so-called “Lost Decade.”

Gieve said that the Bank of England will probably start so- called quantitative easing in the next few weeks to increase money supply. Policy makers are currently debating what the “effective” zero rate is after limiting this month’s reduction on concerns about banks’ willingness to lend at low rates of interest, he said.

Homes, Cars

U.K. home repossessions rose to the highest since 1996 last year and may almost double in the next 12 months as Britain’s recession deepens, the Council of Mortgage Lenders said today. Car production fell 58.7 percent in January, the Society of Motor Manufacturers and Traders said.

Gieve is the latest U.K. official this month to mention the prospect that the economic slump could turn into a depression.

Prime Minister Gordon Brown said Feb. 4 the world is suffering a “depression.” Ed Balls, the Education Secretary and a former adviser to Brown when he was Chancellor of the Exchequer, suggested Feb. 7 that the U.K. is facing a crisis bigger than the slump of the 1930s.

After the panic at Northern Rock Plc in Sept. 2007, Gieve twice joined David Blanchflower in voting in the minority for a quarter-point interest-rate cut, while the majority of the nine- member monetary policy committee preferred no change.

The Bank of England began buying commercial paper a week ago when its asset purchase facility became operational using money allocated by the Treasury. Today the bank said it has so far spent 340 million pounds ($487 million) on the debt.

Too Early

“We don’t know how deep and prolonged this recession will be or how soon and how completely financial markets will recover,” Gieve said in his prepared remarks. “So it is too early to reach settled conclusions on causes or cures.”

The speech was Gieve’s last as a policy maker at the U.K. central bank. He will leave his post at the end of the month after serving on the interest-rate setting Monetary Policy Committee since January 2006.

There are several lessons to be learned from the financial crisis, Gieve said. Targeting inflation may not be enough for policy makers to steer the economy.

“If inflation targeting by an independent central bank is an essential foundation of policy, it is pretty clearly not sufficient on its own,” he said. “Having a large arsenal of policy instruments, which vary in their point of influence, provides some welcome flexibility.”

Cautious Skepticism

Policy makers must “be willing to back their judgments, whether in identifying asset bubbles or identifying firms or markets which threaten financial stability, and to take preemptive action,” Gieve said. “Our default position should be one of cautious skepticism.”

Gieve said that authorities need the power to enforce “dynamic provisioning” for financial institutions to reduce the tendency of some accounting rules to inflate a boom and exacerbate a bust in the economic cycle. Authorities could also introduce restraints on lending terms, he said.

The next interest-rate decision is March 5. Economists expect policy makers to lower the rate another half point to 0.5 percent, according to the median of 26 estimates in a Bloomberg News survey.

To contact the reporters on this story: Jennifer Ryan in London at jryan13@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.

Last Updated: February 20, 2009 07:06 EST