The Governor of the Bank of England dampened hopes of a cut in interest rates as soon as next week when he issued a renewed warning yesterday that Britain's central bank must take a hard line to ensure that present high levels of inflation are quelled.

Mervyn King raised new question marks over the Bank's readiness to cut rates quickly, and over any further moves this year, as he again underlined the anxieties of its Monetary Policy Committee (MPC) that inflationary pressures may prove persistent and hard to eradicate.

However, the Governor, speaking in Jerusalem, still left open the possibility of an April rate cut when he emphasised that although some slowdown in the economy was needed to curb inflation, “we cannot allow the economy to slow too sharply”. This and his comment last week that the credit crunch had left the Bank more predisposed to cut rates left the door at least partly open to a potential move next week.

Mr King struck a more hawkish note, though, as he reiterated that present steep rises in living costs will raise households' and businesses' expectations of future inflation, thus stoking inflationary wage demands and price increases by companies.

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Although the MPC did not want the economy to slow excessively, he insisted that “that does not mean we can ignore the pick-up in inflation that is now under way”.

The Governor said: “We have to gauge the extent to which high inflation in the short term will enter the expectations of those setting prices and pay.” If high inflation became entrenched in expectations, it could be “costly” to dislodge, he added.

Mr King said the MPC could do little about an expected further rise in consumer price index inflation to as much as 3percent in coming months. “What is crucial is that the pick-up proves to be temporary, just as the rise in inflation was last year,” he said.

The more hawkish tone of Mr King's remarks, compared with his testimony to MPs last week, did not prevent currency market speculation over an imminent interest rate cut dealing a further blow to the pound. Sterling's overall value on its trade-weighted index tumbled to an 11-year trough of 92.6, as it plumbed record lows against the euro and slipped below $2. The euro's latest gains against the pound took it to a new high of 79.73p, leaving it 8 per cent up against sterling this year. The pound also fell to $1.9920.

Mr King's remarks left the City split as to whether interest rates will now fall next week, or not until May at the earliest. They came as the mortgage market was thrown into chaos yesterday as more lenders effectively declared themselves shut to new business.

Royal Bank of Scotland and NatWest said they will start turning away buy-to-let investors who lack a deposit of at least 25 per cent of a property's value. The banks previously required a deposit of only 15 per cent, but said the move was a defensive step to maintain customer service quality after a record number of applications.

Bank of Ireland withdrew most of its two-year, three-year and five-year fixed rates yesterday, adding that it would no longer sell two-year fixed or two-year discounted rates.

Woolwich, owned by Barclays, said it would increase rates today after increases by the rival C&G led to a surge in demand for Woolwich mortgages.

Melanie Bien, director of Savills Private Finance, the mortgage broker, said: “The rate at which lenders are pulling mortgage deals and increasing their pricing is unprecedented.”

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