Bank will consider using new powers

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In a speech at the East Midlands Conference Centre in Nottingham on Tuesday night, he said the Bank's Monetary Policy Committee (MPC) would consider using the new powers outlined in the Government's second attempt at bailing out the banking sector.

But Mr King warned the top priority was to first get banks lending again.

He said the Government's package - centring on a mammoth scheme to insure banks against losses on their toxic assets - would "protect the economy from banks".

Taxpayers would share the cost of the sector's past mistakes under the plans rather than bear the full brunt, although he said all major banks must sign up to Government lending targets for the plan to be cost-effective.

Regardless, 2009 will be a difficult year for the UK, according to Mr King.

The recession set to be confirmed in the final quarter of past year will continue into the first half of this year, with further marked falls in output, he added.

And it is unclear when the fiscal and monetary policy actions will start to aid a recovery, he cautioned.

Mr King said: "No one can know at what point the impact of all this stimulus will have a visible effect on activity; the lags in economic policy are notoriously long and unpredictable. But well-designed policies implemented within a consistent policy framework will eventually work."

The Government's bank rescue plan will see a new £50 billion fund created for the Bank of England to use to buy up private sector assets. It is hoped that the move will give companies greater ability to borrow and therefore spend, boosting the economy and bringing inflation in line with the 2% target.