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But he added: “There should be no doubt that the MPC is prepared to take whatever action is needed to return inflation to the 2% target and to keep expectations of inflation in the medium term anchored to the target.”

Rising food and energy prices will cause “a loss of real purchasing power” for British households this year, said Mr King.

He said: “This year our real take-home pay will rise at a slower pace than national productivity. Rising fuel, gas, electricity and food prices, mean that average real take-home pay will stagnate this year.

“It will not be an easy time, and I know that some families will find it particularly difficult.

“But it is only a temporary slowing in the growth of our real take-home pay, and remember that this is the opposite side of the coin to the falls in prices of manufactured goods from countries such as China and India.”

The squeeze on real take-home pay will arguably be “an even more significant restraint on consumer spending this year than the credit crunch”, said the Governor. “Lower demand in the high street will go hand in hand with lower demand in the property market,” he said.

With the era of cheap mortgages now over, “it is reasonable to expect the ratio of house prices to incomes to fall back”, said Mr King.

And he added: “We face the most difficult economic challenge for two decades. But I am confident that we can meet it.

“Inflation will fall back and growth will recover. But the cost of the necessary adjustment will depend on the credibility of the framework for monetary stability.” he said.

Earlier, the Chancellor renewed his call for pay restraint in the public and private sectors to head off the danger of an inflationary spiral.

In his Mansion House speech last night, Mr Darling acknowledged that “times are tough”, but insisted the UK will avoid recession, telling his audience of City financiers: “Our economy will continue to grow.”

Mr Darling’s first Mansion House speech came against a backdrop of intense pressure over inflation and pay, with Downing Street signalling it will resist any effort by public sector unions to renegotiate three-year pay deals in the light of rising prices.

Explore Economics

• Pre-Budget Report 2009

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