The Bank of England governor, Mervyn King has warned the Government that trying to support the UK mortgage market artificially will just make matters worse.

Speaking to parliament’s cross-party Treasury Committee yesterday, Mr King confirmed that the Special Liquidity Scheme will close on October 21st as previously announced and although a permanent liquidity insurance facility is being discussed, it cannot provide a magic solution to the UK’s flagging mortgage market.

Mr King said that state interference could only make things worse, and a Government-run mortgage bank offering cheap mortgages would simply hamper the commercial banks’ incentive to improve their balance sheets.

“The Special Liquidity Scheme was only ever intended as a temporary measure, and the window for placing assets into the Scheme will close as previously announced on 21st October,” said Mr King.

He did say, however, that the provision of liquidity created by the Scheme will continue to be provided to the banks for a period of three years and confirmed that the MPC intends to consult on plans for a permanent liquidity insurance facility.

This, he said, would have the objective of providing “short-term liquidity insurance to smooth the adjustment of financial institutions hit by unexpected shocks,” but, he was keen to point out that any such scheme, despite being an important contribution, will not provide a solution.

“It is not the purpose of central bank liquidity insurance to provide a source of long-term funding to the financial system –indeed it cannot do that,” he warned, “only private savers or taxpayers via the government can provide such funds.

He continued, “I hope everyone will understand that the proposals to be published next week, important though they are, will not and cannot solve the shortage of funding to finance bank lending, including mortgage lending.”

Mr King’s analysis was not all doom and gloom though, and despite admitting that the UK economy faced ‘testing times’ he said he is confident that the situation is only temporary.

“We are in testing times. But our medium term framework was designed to cope with such times,” he said. “Provided we focus on bringing inflation back to target, our present difficulties will prove to be temporary. Inflation will fall back, and growth will resume.”

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