BoE chief says recession likely for Britain

Mervyn King said the financial crisis had squeezed the amount of money banks would lend to consumers and companies, tightening people's wallets at a time when high energy and food prices were also reducing their disposable income.

"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," the governor said. Â

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

But he said the government's re-capitalization of three high street banks earlier this month laid the way for a "long, slow haul to restore lending to the real economy, and hence growth of our economy, to more normal conditions."

The events sparked by the collapse of U.S. bank Lehman Brothers in September, culminating in the 37 billion sterling ($64 billion) banking bailout, were "extraordinary, almost unimaginable", King said.

Speaking to a meeting of business leaders in Leeds, central England, he said it was "difficult to exaggerate the severity and importance of those events".

"Not since the beginning of the first world war has our banking system been so close to collapse," he said.

When the credit crunch first hit in August 2007, most observers assumed the main problem was a lack of liquidity, but central bank injections of liquidity were simply a "sticking plaster... not a substitute for proper treatment".

The government had to re-capitalize -- inject cash in return for shares -- to shore up the banks, and in doing so, protect the wider economy, he said.