'Textbook response' to recession

Bank of England Governor Sir Mervyn King has backed the Government's "textbook response" to the economic crisis despite the UK's slide back into recession.

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% 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.

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