Mervyn Kind has finally admitted the UK is most likely heading toward a recession in 2009. Speaking to business leaders in Leeds he said he was particularly concerned about the rise in unemployment, as well as the drop in house prices.

The economic crisis sent the pound down to a five-year low against the dollar.

The National Institute of Economic and Social Research (NIESR) believe the UK is on the brink of its first full year recession since 1991, and criticised the Bank of England for not cutting interest rates fast enough in response to the credit crunch.

Sushil Wadhwani, an ex-member of the Bank of England’s monetary policy committee, said that the committee was “too slow to acknowledge the risks of a recession and they have fallen behind the curve.

“The consequence of their relative inactivity so far, is that the recession is likely to be deeper and more prolonged than was necessary.”

The NIESR predicted that the UK’s economy will shrink by 0.9 percent in 209, with consumer spending down by 3.4 percent, business investment down by 3.8 percent and a 17.1 percent fall in private housing investment.

The Institute also warned that if the £50bn banking bail-out from the government failed, the recession would be deeper and longer.

“The British economy will suffer next year as it experiences the worst setback among the G7 countries,” it said.

The NIESR said its forecasts assumed the Bank of England would cut interest rates to 4 percent early in 2009, although the chances of bringing inflation below its 2 percent target before the end of next year is slim.

Fears of a recession sent the pound tumbling against the dollar, dropping to $1.620 – its lowest since September 2003. It rallied somewhat to end the day at 1.6255.

Speaking on Tuesday night, Mr King said: “It now seems likely the UK is entering a recession.”

He said the British banking system was the closest its been to collapse earlier this month than at anytime since the start of World War I. He does however the government’s rescue package would lead to normal lending.

“We are far from the end of the road back to stability, but the plan to recapitalise our banking system, both here and abroad, will, I believe, come to be seen as the moment in the banking crisis of the past year when we turned the corner,” he said.

Nevertheless, he said, the “age of innocence” of cheap lending between banks “will not quickly, if ever, return”.

The governor said that inflation looked likely to drop down from its “worryingly high rate” in September, thanks to the recent falls in energy prices.

He said the Bank would continue to set rates “to meet the 2% inflation target, not next month, or the month after, but further ahead, when the impact of recent developments in both credit supply and world commodity prices will have worked their way through the economy”.

Mr King ended his speech saying he hoped for quieter times ahead.

“I have said many times that successful monetary policy would appear to be rather boring.

“So let me extend an invitation to the banking industry to join me in promoting the idea that a little more boredom would be no bad thing.”

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