Fears of immediate interest rate rises receded yesterday as Mervyn King, Governor of the Bank of England, said that drastic rate moves to curb inflation could plunge the country into recession.

But as Mr King and four of his colleagues from the Monetary Policy Committee were questioned by MPs, it emerged that the majority of the rate-setting panel had considered voting for a rate rise this month, strengthening the signals that any future rate move will be upward.

While speaking to MPs, 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 viewed by many as Sir John's likely successor, said they had discussed increasing the rate, as had Kate Barker and Tim Besley, two of the panel's members.

Howard Archer, of Global Insight, the economic consultancy, said it was likely that Andrew Sentance, who has a hawkish voting record, had also raised the possibility of a quarter-point increase.

There was little comfort for households already struggling with bigger bills and falling house prices. Mr King said growth in real incomes would pause for a year, as the increased cost of fuel and energy continued to bite.

He also gave warning that the housing market was entering “a period of very weak activity”, while Ms Barker said that rising mortgage rates were preventing cash-strapped buyers from exploiting the slump in house prices.

Mr King rebuffed accusations that he had failed in his job as he was likely to have to write letters to the Chancellor to explain why inflation had risen by more than 1 percentage point above the 2 per cent target. Inflation rose to 3.3 per cent in May, and the Bank has forecast that it could rise to above 4 per cent before the end of the year.

He wrote one of these letters last week, and has predicted that he may have to write three more. He must write such a letter every three months until inflation falls back below 3 per cent. He said there was no sense in turning the economy into a deep recession “to avoid putting the stamp on the envelope”.

However, Mr King calmed expectations of an immediate rate rise, saying he had found the sharp reaction of the markets to recent economic data puzzling.

“As recently as May markets seemed to be pricing in two, three cuts in interest rates over the next few months and then it swung round in a month to expecting two, three rises in interest rates. That seemed to me a rather sharp reaction to data,” he said.

The markets reacted to his words by cutting expectations for a rate rise in August. Just one quarter-point rise before November is now priced-in.

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