'Difficult period' as inflation remains high

Tough times are set to continue, the governor of the Bank of England, Mervyn King, has told a group of MPs.

Mr King told the Treasury Select Committee that inflation - which stands at 4.4% - would continue to exceed its 2% target, and that the country faced a difficult period in which inflation would remain high, with weak output growth.

The warning follows a European Commission prediction that the UK economy, along with those of German and Spain, will fall into recession this year.

MPs heard financial market conditions are still worsening among all the most advanced industrial economies, while the banking system remained short of capital.

Mr King said there would be two important elements in a period of difficult adjustment.

"First, following the shock last year to the financial system, the balance sheets of the financial sectors in advanced countries need to contract," he said.

"Second, following a long period of rapid growth, there was a need for a slowing of demand to reduce overheating and reduce pressure on commodity prices.

"That two-part adjustment presents one of the most complex challenges that the world economy has faced for a very long while."