Recession likely, warns bank chief

Mervyn King said the UK faced a "long, slow haul" to repair the economic fall-out from the recent banking havoc.

The banking system faced its biggest threat for almost 100 years after an "almost unimaginable" chain of events set in train by the collapse of Lehman Brothers in September, he said.

In a speech to business leaders in Leeds he said: "Why has the outlook deteriorated so quickly? The banking crisis dealt a severe blow to the availability of credit...

"We now face a long, slow haul to restore lending to the real economy, and hence growth of our economy, to more normal conditions".

A recession looms because the credit squeeze came at a time when disposable incomes were falling due to rising energy and food prices.

Mr King added: "So, taken together, 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.

"Indeed, it now seems likely that the UK economy is entering a recession."

The outlook for the world and the UK economy was "very uncertain" after a "somewhat too exciting" past few weeks, the Governor said.

But the recapitalisation of the banking system - including £37 billion for Royal Bank of Scotland, HBOS and Lloyds TSB will come to be seen as "the moment... when we turned the corner", he predicted.