Mervyn King, the Governor, Bank of England, has warned MPs of the full extent of the effect that the credit crunch is expected to have on the UK economy. He in turn has promised to push more money into the markets to bolster confidence in the UK financial system.

About the housing and realty sector, he prophesized that it will remain more or less stable. Houses will become more affordable for first time buyers due to the slowdown and the return of the ratio of wages to house prices to normal values.

He stated that although all over the world, the confidence in the financial sector is weakening; at least the banks in the UK have not given out loans to an extent that may lead to unsustainable losses.

Although a lot of cash flow has occurred into the money markets, the Libor Rate, which is the rate at which banks loan money to each other, has remained high. What is more worrying is that all efforts from central banks have failed to contain these rates. Mr. King said that long term solutions to this problem are being worked out.

Mr. King also told Mps that inflation was still likely to rise, probably over the 3% mark, pushed up by rising fuel prices. This will cause an increase in essential commodities such as oil, food and energy. He however was certain that in the long run, inflation may come down to the Government’s target of 2%.

He also denied the likelihood of following the American example of aggressively cutting interest rates after assuring that the UK economy, with all its pitfalls, was not nearly as bad as the American economy, especially in the labour and housing markets.