The coming year will see real take-home pay “stagnate” and property prices fall, the Governor of the Bank of England gave warning last night.

And he made clear that the Bank’s Monetary Policy Committee (MPC) is prepared to impose increases in interest rates in its efforts to rein in inflation.

Despite acknowledging that Britain faces “the most difficult economic challenge for two decades”, he held out hope of a return to lower inflation and healthier growth, so long as the monetary discipline imposed by the MPC is maintained.

A day after writing to Chancellor Alistair Darling to explain why inflation is at 3.3% and could hit 4% this year, Mervyn King insisted that the MPC is ready to take “whatever action is needed” to return it to its 2% target.

In a speech following Mr Darling’s annual Mansion House address last night, Mr King echoed the Chancellor’s warning that wage rises must be kept in check to control inflation.

Mr King - who recently declared the end of the “nice decade” of low inflation and constant expansion - rejected arguments that, in the current economic slowdown, the Bank’s focus should be on spurring growth rather than taming inflation.

“Target growth, not inflation, is the cry,” he said. “I could not disagree more. This is precisely the situation in which the framework of inflation targeting is so necessary. Without it, what should be a short-lived, albeit sharp, rise in inflation, could become sustained.”

Although he acknowledged that the main drivers of the current inflation spike were global supply and demand pressures on food and oil, Mr King insisted that action can be taken domestically to put a lid on prices.

“The rise in commodity prices cannot, by itself, generate sustained inflation in the UK unless we allow it to,” he said. “We will not.

“So although inflation in the UK will rise in the short term, inflation will then fall back.

“That means that the rate of increase of other prices and domestic costs, notably pay, must remain low.”

It was “impossible to judge” what level the base rate will eventually have to reach in order to bring inflation back down, and the MPC’s decision will be made on a month-by-month basis, said Mr King.

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