Bank of England governor Mervyn King has for the first time admitted the UK is entering a recession.
Speaking in Leeds last night, King says the financial turmoil following Lehman’s failure last month pushed the banking system closer to collapse than any time since World War I.
His comments sparked a dramatic tumble for the pound, which this morning hit a five-year low against the US dollar.
The governor says the UK Government and counterparts from all over the globe needed to take decisive action to bring urgent stability to the system.
Following the Government's bank rescue package, King says the UK taxpayer now has a larger claim on the assets of banks – in collateral held by the Bank of England – than the total equity value of UK banks.
While King expects the recapitalisation to lead to a resumption of lending over time, he believes the UK economy faces other widespread challenges such as unemployment and further weakness in the housing market.
“The combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand,” King says.
“Indeed, it now seems likely that the UK economy is entering a recession.”
King says the Bank of England will continue its dual commitment to bring stability and keep inflation in check.
“With the bank recapitalisation plan in place, we now face a long, slow haul to restore lending to the real economy, and hence growth of our economy, to more normal conditions,” he says.
“The past few weeks have been somewhat too exciting. The actions that were taken were not designed to save the banks as such, but to protect the rest of the economy from the banks.”
Minutes of the Monetary Policy Committee's (MPC's) emergency meeting earlier this month revealed all nine of its members voted for a 0.5% base rate cut.
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