BRITAIN is likely to go into recession and faces a "long slow haul" before banks restore normal lending, the Governor of the Bank of England said last night.
Mervyn King told a Yorkshire audience that the outlook for the British and world economy was very uncertain and the banking crisis would damage business and consumer confidence.
Speech in full »He also predicted that the slowdown in demand and recent falls in energy prices would pull inflation down from its present worryingly high level to the target rate of two per cent.
Mr King said he believed the plan to recapitalise the banking system would later be seen as "the moment we turned the corner" in the global financial crisis.
He said there were signs it had already led to a partial restoration of confidence.
The Governor was speaking at a special dinner in Leeds organised by the Bank of England as part of a week-long fact-finding tour of Yorkshire by members of its Monetary Policy Committee, which sets British interest rates.
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Listen to Mr King in a special edition of the Yorkshire Post's business programme, BusinessTalk.
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He told the audience: "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.
"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.
"I have said many times that successful monetary policy would appear rather boring. So let me extend an invitation to the banking industry to join me in promoting the idea that a little more boredom would be no bad thing. The long march back to boredom and stability starts tonight in Leeds."
Mr King said the combination of a squeeze on real take-home pay and a decline in the availability of credit posed the risk of a sharp and prolonged downturn in domestic demand. He added: "It seems likely that the UK economy is entering a recession."
He pointed out that consumer price inflation had risen from two per cent at the start of the year to 5.2 per cent.
Mr King said the Monetary Policy Committee "must continue to set the bank rate to meet the two per cent inflation target, not in the next two months, but further ahead when the impact of recent developments in both credit supply and world commodity prices will have worked their way through the economy."
The Governor said it was too difficult to assess the prospects for oil and other commodity prices and added: "It will take time before the recapitalisation leads to a resumption of normal levels of lending by the banking system to the real economy.
"And we cannot assume that there will not be problems in other parts of the financial system and in some emerging market economies to be overcome before the crisis can truly be described as over."
All but one member of the Bank of England's Monetary Policy Committee are in Yorkshire this week taking part in about 30 events across the county.
More than 1,000 people attended last night's dinner, which was sponsored by the CBI, the Institute of Directors, Leeds Chamber and development agency Yorkshire Forward.
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