The Bank of England's Deputy Governor dampened hopes of aggressive cuts in interest rates to bolster the economy yesterday as he highlighted its increasingly acute dilemma over a likely “sharp rise” in inflation, even as growth falters.

Sir John Gieve's comments came as the quandary confronting the Bank's Monetary Policy Committee was deepened by a key survey that showed price pressures across the economy continuing to mount, despite weakening activity in both the manufacturing and services sectors.

Growth in the economy was already “slowing quite sharply”, the Deputy Governor told the London Chambers, suggesting that this alone should justify lowering interest rates.

But he added that the case for action was “greatly strengthened by the disruption in global credit markets and in our own banking system, which brings a risk of a deeper downturn”.

Those remarks reinforced the likelihood that the MPC will cut interest rates again, as much of the City expects, next month. However, Sir John also emphasised the continued threat from inflation, raising questions about how far and fast base rates might fall.

Surging food and fuel prices were “likely to raise our inflation rate well above target in the coming months”, he said. With households and companies also expecting rising inflation, threatening to lead them to stoke wage demands and prices, he said this meant that “these are testing times for the MPC”.

Earlier, the latest snapshot of the economy from the British Chambers of Commerce showed the awkward circumstances facing the Bank, with more businesses of all types planning to raise their prices in the final quarter of last year than at any time in the past ten years, in spite of weakening demand.

The BCC's survey of 4,600 businesses showed that this inflationary pressure came as new orders from at home and abroad flowing into the services sector fell to their lowest levels in 1 years, while new export orders for manufacturers were also the lowest for 18 months.

Confidence over turnover and future profitability in both of the economy's main sectors has also tumbled, a signal that is often a reliable gauge of tougher times ahead. Business investment intentions in manufacturing and services are also down.

Explore Economics

• Pre-Budget Report 2009

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive