Darling calls for restraint on pay

In his high-profile Mansion House speech, Mr Darling acknowledged that "times are tough", but insisted the UK will avoid recession, telling his audience of City financiers: "Our economy will continue to grow."

The Chancellor also confirmed plans to strengthen regulation of financial services in the wake of the collapse of Northern Rock, including by giving the Bank of England a new legal responsibility for financial stability.

A new Financial Stability Committee, including members drawn from outside the Bank, will sit alongside the Monetary Policy Committee which sets interest rates.

Mr Darling's first Mansion House speech came against a backdrop of intense pressure over inflation and pay, with Downing Street signalling it will resist any effort by public sector unions to renegotiate three-year pay deals in the light of rising prices.

On Tuesday, the Governor of the Bank of England Mervyn King was forced to send a letter to Mr Darling explaining why inflation, at 3.3%, had risen more than 1% over target, and the Chancellor said he expected to receive more such letters over the coming months.

But he said that, despite pressures from rising global oil and food prices, Britain had maintained the lowest inflation rates of all G7 countries except Japan this decade and was "well placed to continue this record".

He added: "Continued restraint on pay is required from both the public and private sector. We must recognise the need to reward efforts of people who work hard. But to return now to inflationary pay settlements would undermine rather than raise people's living standards with a damaging circle of wage increases eroded by steadily rising prices. We must never return to those days."

Mr Darling rejected suggestions that the UK was heading for a 1970s-style period of stagflation, with stagnant growth and spiralling inflation fuelled by large pay increases.

In contrast to the 1970s, when economic woes were driven by domestic factors such as inflationary pay rises and low productivity, today's turbulence is caused by international pressures from oil and food prices, being felt by every economy in the world, he said.