The Bank of England chief suggested that the existing £500billion rescue plan announced by Gordon Brown in October and dramatic interest rate cuts are proving insufficient to solve the current banking crisis, intensifying rumours that a potential nationalisation of Britain’s banks might be on the cards.

Mr King told Alistair Darling that “Additional measures, building on the Government’s package to support the banking system announced in October, will probably be required to underpin lending to households and companies.”

The letter was primarily about this month’s drop in inflation, which has fallen back to 4.1 per cent in November, down from its peak of 5.2 per cent in September but still twice the target rate of two per cent; this time last year it was at 2.1 per cent.

The Governor said that the previous spike in inflation was due to the sharp increase in the global price of commodities such as food and energy, with oil prices rising more than 50 per cent between January and July and the average price of a grocery shop soaring 30 per cent.

Similarly, the recent movements in the commodity markets where prices have dropped back down significantly have slowed inflation; oil and food prices have fallen more since the summer than they rose in the first half of the year, by 66 per cent and 40 per cent respectively, and Mr King expects the recent movements in Consumer Price Index (CPI) inflation to continue in the coming months as global wholesale prices continue to fall.

This could potentially lead to deflation in 2009, he warned the Chancellor, and said that next year he might not have to write further open letters to explain why inflation is above the target rate, but rather to explain why it is below the target rate.

“It is possible that I will not need to write a further open letter to you in three months time.” he said. “Indeed, given the shortterm outlook for inflation, it is quite possible that I will next need to write to you to explain why inflation has deviated by more than one percentage point below the target during 2009.”

Meanwhile, the US Federal Bank has moved to cut interest rates to their lowest-ever level of 0.25 per cent, as it attempts to boost lending and lift the world’s biggest economy out of a deteriorating economic situation.

“Since the Committee’s last meeting, labour market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined.” the Federal Reserve said in a statement.

“Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.”

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