Mervyn King, governor of the Bank of England, has warned a committee of MPs the credit crunch is having a major effect on the UK economy.
King also promised to inject more cash into the money markets to try and restore financial confidence.
Speaking before the Treasury Committee, King told MPs that the credit crunch was moving into a new and different phase.
Libor rates have remained high despite the central bank pumping billions into the financial system and King says the problem is not in the real economy, but within the financial sector.
King is concerned that central bank efforts to improve confidence have so far failed but says the Bank of England will continue to offer cash in an attempt to boost confidence.
However, this was only a short-term solution, he says, and a plan to boost long-term confidence would need to be discussed with the banks.
He did not predict a house price crash, instead saying prices would remain broadly stable for the next few years, enabling wages to catch up.
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