King denies slow response to the banking crisis

Asked if the Bank had been "caught with its pants down", governor Mervyn King strenuously rebutted the attacks.

King said "the world has changed" since the collapse of Lehman Brothers in September, and added that the Bank acted swiftly in response to the banking crisis.

Speaking at a Press conference after publication of Bank's Quarterly Inflation Report, he pointed to the recapitalisation of high street banks such as HBOS, Lloyds TSB, and Royal Bank of Scotland, as well as the decision to cut interest rates aggressively in recent weeks.

"That is a pretty big response," said King. "We haven't lost touch with reality."

He also insisted that last week's dramatic rate cut from 4.5 % to 3% was not the result of political pressure.

"At no point has there been any pressure or any phone call or any message to say that government would like the following outcome to be achieved," said King.

The Bank slashed its forecasts for economic output and inflation in what was the largest downward revision to the consumer prices outlook in any one quarter since the MPC was set up in 1997.

In August, it forecast a year of broadly flat output and inflation to fall from above 5% to the target of 2% within two years.

Today, it said the UK was already in a recession which will last until the end of next year. Inflation, meanwhile, will hit 2% in before potentially undergoing the first bout of deflation in almost 50 years.

The collapse of Lehman Brothers was pivotal, King said: "We have seen the biggest banking crisis since the outbreak of the First World War and arguably even bigger than that.

"The effect that has had on credit, the sharp downturn in confidence, activity, and orders, and the extraordinary fall in commodity prices - this was not expected in August."

The pound fell sharply after the report was published, plunging as low as $1.5201, its lowest level since August 2002. It was later down 0.92 of a cent at $1.5328.

King, who has already had to write two letters to the Chancellor explaining why inflation has overshot the target by more than 1%, now faces the prospect of having to write to explain why it has hugely undershot.