Holding back inflation is still a priority, but the Bank of England will not take knee-jerk reactions to cut back the rising cost of living.

Mervyn King, governor of the Bank of England, told MPs today he would not overreact to current high inflation.

Speaking to the House of Commons Treasury committee, Mr King explained the fact he is forced to write letters to the chancellor of the exchequer with inflation over three per cent was not an admission of failure.

He added further letters would be written as inflation is expected to stay high, following recent hikes in energy and fuel prices, but the effects of the increases would pass out of the consumer price index.

“I enjoy writing letters,” Mr King told MPs. “To bring inflation down to avoid writing letters is not sensible.

“It would not be sensible to overreact… to send the UK economy into recession to avoid the price of a stamp on an envelop.”

He added the Bank of England had dealt with high inflation before and would bring down the consumer price index (CPI) again

“We have done it once and I believe we can do it again,” he said.

Turning to the housing market, Mr King was determined to point out the current position was not a return to the property crisis of the 1990s.

Although he admitted no-one knows where house prices are going, the proportion of households in arrears is now one per cent, compared with was six per cent in 1990s.

He added, for a major crisis to occur meaning households could not afford mortgages, interest rates would have to rise greatly, which they haven’t, and a major upward shift in unemployment would need to happen.

However, Mr King explained a slowdown in property market was natural as buyers were uncertain where house prices would head.

Kate Barker, outgoing deputy governor of the Bank of England, explained there were some benefits to house price falls, removing the belief of buy-to-let investors that property prices would only rise.

“In the short-term house price falls are not good news, but they could be helpful… removing the belief house prices will rise expedientially is a benefit,” she said.

Mr King moved on to claim the worst of the credit crunch was now behind the banking sector.

“Illiquidity problems are behind us,” he told the MPs.

However, he explained the great expansion in the size of financial firms seem in recent years is now facing a reversal, as the unwinding of balance sheets – or deleveraging – steps up.

As such, banks were unwilling to expand – and lend to households – in the short term, but he expected profits were to be made for lenders.