The Governor of the Bank of England has dampened hopes of a cut in interest rates in the next few months, despite the market turmoil, as inflation hit a 16-year high of 4.7 per cent.

Mervyn King said yesterday that inflation was set to rise further to peak at 5 per cent, higher than the Bank forecast in June. He also admitted that inflation was unlikely to come back to the Government's 2 per cent target until well into next year.

Mr King's comments came in his letter of explanation to the Chancellor that he must write when inflation rises 1 per cent above the target and every three months thereafter until it falls back below the 3 per cent threshold.

The letter struck a hawkish tone, with Mr King saying that the rate-setting Monetary Policy Committee (MPC) had become firmer in its belief that an economic slowdown was needed to bring inflation back under control.

The pressure on the Bank to cut rates has been mounting. The economy ground to a halt between April and the end of June, according to official figures, while the CBI said this week that the country was already in recession. The employers' group said that the economy would shrink in the second half of this year, echoing recent forecasts from the European Commission and the Organisation for Economic Co-operation and Development (OECD).

The clamour for rate cuts was fuelled yesterday as the TUC said that the number of long-term unemployed could almost double. It said that the number of people out of work for a year or more would rise from the present rate of 450,000 to 700,000 by the end of next year.

Adam Lent, head of economics and social affairs at the TUC, said: “The Bank of England can play a key role in helping to reinvigorate the economy by cutting interest rates this month.”

Surging energy and food costs helped to push inflation up for the fifth month in a row, from 4.4 per cent in July to 4.7 per cent in August, the highest level since April 1992, official figures showed. Analysts had expected a more modest rise to 4.6 per cent.

Households are paying 27.7 per cent more on their gas bills and 18 per cent more for electricity than in August last year. Food prices rose by 1.4 per cent during the month to reach a record annual growth of 14.5 per cent.

However, the Office for National Statistics (ONS), which compiled the figures, said that this rise was partly offset by the falling cost of petrol and diesel, which slipped back by 4.6 per cent during the month.

The Bank will be concerned about the rise in core inflation, which excludes volatile energy and food prices. It rose from 1.9 per cent in July to 2 per cent in August, a ten-year high, signalling that the rise in oil

and commodity prices was feeding through to the wider economy. This will heighten fears that workers may put employers under increased pressure to raise wages to cover their increased cost of living. This, in turn, could lead to increased prices as companies try to claw back their increased wages bill, further stoking inflation.

“The impact of continuing high inflation on price and wage pressure may be larger than currently envisaged by the MPC,” Mr King wrote.

A drop in the RPI measure of inflation, which includes housing costs and to which many pay deals are linked, provided some relief. RPI fell to 4.8 per cent in August from 5 per cent in July.

However, Mr King raised concerns that the falling pound could exacerbate the rise in inflation as imported goods become more expensive. The poorest households have been particularly badly affected by the rise in the cost of these staples, which account for a larger proportion of their income. The inflation rate for the poorest homes in the country is 5.7 per cent, a report from PricewaterhouseCoopers suggested, while the richest households have an effective inflation rate of 4.6 per cent.

A rise in the cost of banking services also helped to push inflation up in August as mortgage lenders cut their mortgage arrangement fees by less than they did last year, the ONS said. Five years ago a borrower typically paid £299 or £399, but today fees of more than £1,000 are commonplace.

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