The Governor of the Bank of England said the UK economy will go into a “steep recession” if banks don’t return to normal lending.

Speaking to the Treasury Select Committee yesterday about the challenges facing the UK financial system, Mervyn King said: “domestically, the most pressing is to ensure that normal bank lending is resumed. Without that,” he said,” the downturn in activity could become protracted and extremely damaging.”

Talking about the action that had already been taken by the Government, including the bank bail-out last month, he said “much though still remains to be done.”

Mr King described the current economic situation as “exceptional and difficult” but assured ministers that the Monetary Policy Committee is “well suited to confront the challenge.”

“The MPC will take whatever action is necessary to ensure that inflation is close to target in the medium term,” he said, and, according to analysts, he did little to discount the chance of a further rate cut next month.

Mr King also refused to rule out nationalising banks and said that the Government may have to directly intervene to ensure the banks start to increase their lending. While speaking to the BBC, the Chancellor said that the situation was “urgent”.

Alistair Darling said that more banks need to “step up to the mark” when it comes to offering mortgages and other loans, and warned that if normal lending is not resumed, the Government would consider “what further action is appropriate”.

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