Mervyn King, Governor of the Bank of England, today attempted to calm expectations of a sudden rush in interest rate rises as it emerged nearly half of the Monetary Policy Committee admitted to discussing an increase in borrowing costs.

Mr King and four of his colleagues on the MPC, which is responsible for the UK interest rate, were speaking before the Treasury Select Committee on why inflation reached 3.3 per cent in May.

The Governor maintain his stance that inflation will increase over 4 per cent by year-end.

Mr King said: "One of the things that we have found slightly puzzling in recent months was that as recently as May markets seemed to be pricing in two, three cuts in interest rates over the next few months and then it suddenly swung round in a month to expecting two, three rises in interest rates.

"That seemed to me a rather sharp reaction to data."

A number of members on MPC admitted to MPs they had discussed raising the interest rate at this month's meeting, before voting to keep borrowing costs at 5 per cent.

Sir John Gieve, the Bank's Deputy Governor in charge of financial stability who is stepping down next year, and Paul Tucker, the markets director who is viewed by many as Sir John's successor, discussed increasing the interest rate as did Kate Barker and Tim Besley.

Mr King re-iterated that the Bank still expects inflation to rise to more than 4 per cent before the end of the year and highlighted that controlling inflation was the Bank's only concern.

“I am confident that we will bring inflation back to the target, but I cannot tell you what level of interest rates we will need to set to achieve that, " he said.

Economists say that while there is widely expected to be an increase in interest rates, it is not expected as soon as next month.

Matthew Sharratt, economist at Bank of America, said: “On balance, we see no clear signs from today’s testimony that the MPC is about to raise rates in the near-term despite the market currently pricing in a risk of a move in August already.”

There was also more bad news for homeowners as Mr King said housing market activity would continue to slow.

Mr King told MPs that house prices had reached a level that was difficult to rationalise and uncertainty remained over how far prices would actually fall: “We are likely to see a period of extremely weak activity," he said.

Mortgage lending for house purchases fell to a record low in May, according to new data from the British Bankers' Association, and high street banks expect home loan levels to sink further as first-time buyers continue to struggle to secure loans.

Ms Barker, a housing expert and author of two reports on the UK planning system, said she did not believe the housing market slowdown was as bad as that seen in the 1990s as the economy was in recession at the time.

However, house prices have fallen by 7.7 per cent since the market turned in September, nearly as much as the falls seen in 1992, the worst year of the housing slump.

Ms Barker conceded that the drop in housing construction this year was “far more severe” than in the previous slowdown, and said mortgage rates rises meant that buyers were not benefitting from house prices falls.

Mr King said that the economy was seeing a major adjustment in not just house prices but throughout the entire banking system.

“The time over which these adjustments will take place is almost impossible to judge," he said.

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