Falling house prices and dearer mortgage deals from lenders have raised fears that thousands more borrowers could lose their homes in the looming slowdown.

But Mr King said today repossessions were “markedly below” the levels seen at the peak of the last recession, with just 1% of borrowers more than three months in arrears compared to 6% then.

He said: “It is worth hanging onto the fact when families get into difficulties the question is what affects their ability to service mortgage debt.

“What caused major problems in the 1990s was the doubling of interest rates and the very sharp increase in unemployment. None of these things apply at present, neither are they part of our central projections.”

But Mr King did warn that already hard-pushed Britons must prepare themselves to further tighten their belts.

He said: “As those price increases feed through to household bills, they will lead to a squeeze on real take-home pay, which will slow consumer spending and output growth, perhaps sharply.”

The Bank added to the gloom by predicting growth could slow to just 1 per cent this year - well below official Government forecasts - as banks hit by the credit crunch tighten up lending and consumers alarmed by falling house prices save more.

Mr King said: “We are travelling along a bumpy road as the economy rebalances, and the balancing act faced by the Monetary Policy Committee (MPC) is even more challenging than it was in February.

“The MPC is facing its most difficult challenge yet. For the time being at least, the nice decade is behind us.”

Mr King said that external factors, such as high food and fuel prices, and problems in the global financial markets and the subsequent credit crunch, were hitting the UK and would have a noticeable impact on the economy.

“But lenders and consumers are reverting to a more sensible and prudent approach to lending and borrowing,” he added.

Referring to the recent £50bn cash injection into the money market to prop up mortgage lending, Mr King said it had been successful “so far, but it will take a long time before its effects feed through”.

The economic slowdown hit the jobs market when the number of people claiming Jobseeker’s Allowance rose at the highest rate for two years, fuelling a big rise in unemployment.

The so-called claimant count went up by 7,200 in March to 806,300, the third consecutive monthly rise and the biggest monthly increase since April 2006. Conservative shadow work and pensions secretary Chris Grayling said:
“These figures should give everyone cause for concern.

“With all the economic bad news around at the moment and the mounting cost of living, rising unemployment is just going to make a difficult situation worse.”

Liberal Democrat shadow chancellor, Vince Cable said: “This is a clear sign that a combination of the credit crunch, rising inflation and massive personal debt has now started to impact on the economy.

“The fact that Gordon Brown ignored the mounting economic warning signs is now looking deeply complacent.”