There is no magic wand to solve the mortgage drought crippling the economy, the governor of the Bank of England, Mervyn King, has warned.

A permanent successor to the Bank's Special Liquidity Scheme, which allows banks to shore up their balance sheets by swapping risky assets for Treasury bonds, will be published next week.

But Mr King has said: "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."

The lack of mortgages in the wake of the credit crunch has sent the housing market into a tailspin, with a damaging knock-on effect on the wider economy.

Bank of England figures last week showed just 33,000 mortgages were approved for house purchase during July - a record low and barely a quarter of the 114,000 approved 12 months earlier.

Mr King said the UK faced "testing times" as the Bank's Monetary Policy Committee also grapples with inflation at more than double its 2% target due to surging oil, food and energy costs. These inflation risks have prevented it cutting rates in recent months to help the economy.

"In the UK we face a difficult, but temporary, period during which inflation will remain high for a while and output growth at best weak," he told MPs on the Treasury Select Committee.

Official inflation stands at 4.4% and is expected to rise to around 5% - prompting another open letter to the Chancellor, Alistair Darling, next week to explain why the cost of living is more than 1% above target.

Most economists, meanwhile, predict the UK will be in a recession - defined as two successive quarters of contraction - by the end of this year as the credit clampdown bears down on the economy.

Mr King said: "Perhaps of even greater significance for demand, real take-home pay has been squeezed by rises in energy and food prices, so holding back household spending."

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