Bank chief Mervyn King: Ask for a pay increase and interest rates will rise

In a blunt message, governor Mervyn King told MPs there is no 'magic bullet' to protect workers from their incomes being squeezed.

But he said they should avoid making excessive pay claims to cover the rising cost of living.

Bank of England Governor Mervyn King appearing before the Treasury Select Committee this morning

He also admitted cash-strapped families will find no shelter this year from the impact of rising oil and food prices.

'We are all in this together,' Mr King told the Treasury Select Committee.

'The most important thing is there's no magic bullet that will protect the UK from higher oil and food prices imposed by the rest of the world.

'It is better than we face up to that now and recognise that fact, rather than pretend to ourselves that we can avoid it.'

Mr King's comments were made against a backdrop of increasing union militancy as leaders vow to push up wages in order to compensate their members for higher living costs.

Earlier this month Shell tanker drivers won a 14 per cent, two-year pay deal following a four-day strike.

Meanwhile, earlier this week hundreds of thousands of council workers represented by the Unison union voted in favour of industrial action over below-inflation pay deals.

They will be joined by almost 40,000 members of the Unite union in a two day walkout on July 16 and 17. Bank of England policymakers are worried higher wages will exacerbate inflation, forcing it to raise interest rates. While the Bank left rates unchanged at 5 per cent this month, Mr King and his colleagues signaled they are ready to raise borrowing costs if necessary.

Tim Besley, a member of the Bank's Monetary Policy Committee, said: 'We have to adjust our living standards. One of the mistakes we can make collectively is to believe that by bidding up our wages we can somehow insulate ourselves from a global phenomenon - rising energy and food prices.

'If we do that that is a self-defeating process which will lead to higher inflation and wages will not end up being higher.'

Mr King suggested the Bank could provoke a painful slump by raising rates if inflation gets out of control.

He said: 'The cost of reducing inflation once it stays above the target for a period will be a very prolonged and deep slowdown in activity.'

Mr King warned inflation will exceed 4 per cent later this year. The Bank is forecasting a slowdown in economic growth to 1 per cent later this year.

On the housing market, Mr King said the outlook is very weak.

Another member of the MPC, Kate Barker, told MPs the fall in house prices is not, in the short term, good news, but there were some positive aspects.

'There was an element of speculation in the market, especially in buy-to-let,' Miss Barker said. The removal of the 'erroneous belief' that prices will only go up is a positive, she argued.