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The UK economy faces a "rather uncomfortable" short-term outlook, Bank of England (BoE) governor Mervyn King has said.

Mr King told the Treasury select committee that life for the monetary policy committee (MPC) had been complicated by financial instability abroad and the prospect of slowing growth at home in the last few months.

His opening remarks included no real suggestion that the MPC will lower interest rates next week, despite admitting that market expectations had seen a 0.75 per cent fall since September.

Instead he warned that consumer spending was likely to fall as borrowing becomes more expensive and less easily available.

Inflation is expected to rise in the short-term before falling back to target, but Mr King admitted that the outlook remained "highly uncertain".

This "makes the task of navigating through the next few months far from straightforward", he added.

Mr King announced his commitment to help reserve banks through the difficult new year period by offering a five-week lending facility constituting "a substantial proportion of the reserves we supply".

He finished: "The challenge for the MPC at present is that inflation may rise in the near-term, posing a risk to inflation expectations, and could fall below target further ahead in the event of a sharp slowing in output growth.

"We shall return to the question of what that means for interest rates at our meeting next week."