King urges more lending to fend off slump

By Paul Hoskins and Christina Fincher

LONDON (Reuters) - Banks must resume lending if the country is to avoid a steep recession, Bank of England Governor Mervyn King warned on Tuesday, although he said a government fiscal boost should go some way to fending off a slump.

"I am in no doubt that the single most pressing challenge to domestic economic policy is to get the banking system to get lending in any normal sense. That is more important than anything else at present," King said.

However he cautioned against excessive focus on home loans.

The governor told parliament's Treasury Select Committee

the Bank might need to cut interest rates more than it would otherwise have done if banks continued not to pass on cuts.

"We will take whatever action we feel is necessary on interest rates to steer the economy back into calmer waters."

King said banks needed to feel confident enough to lend and gave a strong hint bank capital adequacy rules could be relaxed to help ease lending conditions.

Bank lending has effectively dried up as a result of the global financial crisis, and the government has made reviving lending a key plank of its economic recovery plan.