He blamed the spike in food and energy prices for growth stalling but in a boost for Chancellor George Osborne insisted there were “signs of a recovery”.
Sir Mervyn admitted the Bank had been “late to the game” in understanding how fragile the banking system was, but insisted the institution was not alone in failing to grasp the scale of the crisis.
The UK suffered a shock return to recession after official figures showed the economy shrank in the first quarter of this year, following a contraction in the final three months of 2011.
Labour has claimed it is a recession “made in Downing Street”, but in an interview with BBC Radio 4’s Today programme Sir Mervyn backed the coalition’s approach to tackling the budget deficit.
“The strategy was that there would be a gradual move towards reducing the budget deficit over five years, that there would be an acceptance of the significant fall in sterling of 25 per cent and there would be a rebalancing of the economy,” he said.
“We had to rebalance our economy because we had a trade deficit. So this was an absolutely textbook response to the situation.
“If it had not been for the squeeze on real take-home pay being exacerbated by the rise in energy and food prices then I think we would have seen some growth.”
He said there was a “patchy picture” around the country but “there are indeed signs of a recovery coming and we see that in the business surveys and I think also in the employment data”.
“So I think a reasonable view would be that we would start to see steady, slow recovery coming during the course of the year.”
In a lecture on Wednesday night Sir Mervyn urged the Government not to delay reforming the financial sector and admitted more should have been done to avert the banking crisis.
The Governor conceded the Bank of England should have “shouted from the rooftops” that banks had been allowed to borrow and lend too much.
Explaining his comments, he said: “We were certainly late to the game in understanding the scale of the fragility in the banking system and the potential consequence when those risks materialised.
“But we were in good company. It was not the case that people were saying to us, ‘gosh, you really ought to raise interest rates to slow down what’s happening in the banking sector’.
“I remember that in the 10 years before the crisis hit, the UK had higher interests rates than any other G7 country for nine and a half of those 10 years, and most of the comment about what we did was to press us to lower interest rates.”
He said the Bank would co-operate in any fresh investigation into the crisis.
The Governor said any government coming to power in 2010 would have had to tackle the budget deficit.
“A balance had to be struck between either cutting that very rapidly, which would undoubtedly have pushed the economy back into a deep recession, or pushing it off for several years and not publishing a detailed plan to deal with it.
“Both of those, I think, would have been wrong. A balance had to be struck between them, I think the balance that was struck was a perfectly sensible one.
“You can argue at the margins. I think we have been disappointed in the last couple of years by the extent to which energy and food prices around the world have gone up.” Sir Mervyn said the main point of his speech was“not to try to blame anyone but acknowledge the failure of a system.