The Bank gave no indication on whether rates would rise again

The official estimate of output growth in the third quarter was 0.4%, below the rate predicted in August.

But in parliamentary testimony, Mr King and members of the Bank's rate-setting panel have identified a more a positive picture in recent business surveys.

The central view remains one of "steady growth," said Mr King.

"Business surveys continue to come up with more optimistic pictures," Mr King said.

The MPC remains ready to take whatever action is necessary to keep inflation on track to meet the target Mervyn King, BoE governor

Importantly, they were not showing an outright fall in manufacturing output, he said.

A separate assessement of the UK's economic outlook issued on Tuesday has predicted a slowdown in growth in Britain - and other major economies - as rising oil prices take their toll.

The UK economy will expand by about 2.5% in each of the next two years, compared to 3.2% this year, the Paris-based Organisation for Economic Cooperation and Development (OECD) said in its half yearly report.

Uncertainty

Mr King told MPs that with many uncertainties surrounding the economy, no-one can be sure about the outlook for inflation and interest rates.

The Bank's chief economist, Charles Bean, told the parliamentary committee that there was quite a bit of inflationary pressure in the pipeline.

Another member of the Bank's rate-setting Monetary Policy Committee, Stephen Nickell, agreed that inflation would increase but said he was happy with where interest rates were at present.

MPC members gave no indication on whether interest rates would be going up again in the current cycle.

Mr King said he expected inflation to rise above the 2.0% target in two years' time, and this was backed by the latest OECD forecasts.

"Despite recent rises in petrol prices, CPI inflation has been lower than expected, and below the 2.0% target," he said.

This reflected "downward pressure on the prices of imported food, competition in the distribution sector, and modest wage inflation."

Upside risk

But the MPC warned that there were also upside risks to earnings and inflation given a lack of spare capacity in the economy and the tightening labour market.

Further tightening may be needed in during 2005, in particular due to increasing pressures from the labour market OECD

However, the use of migrant labour has enabled employers to deal with skills shortages, Mr King said.

"That has helped to remove some of the upward pressure on pay that might have been there," he said.

The OECD said the UK's economic slowdown in the third quarter and continuing low inflation warranted a further pause in monetary tightening.

However, it said "although further tightening may be needed in during 2005, in particular due to increasing pressures from the labour market."

Mervyn King, meanwhile, was keen to reassure parliament that the MPC had its hand firmly on the tiller.

"You can be certain of one thing, and that is that the MPC remains ready to take whatever action is necessary to keep inflation on track to meet the target," he said.

Tax dilemma

Meanwhile, he declined to comment on whether or not Chancellor Gordon Brown's 'golden rule' on fiscal policy had been met.

"I won't give any judgement on whether the numbers for this particular year are consistent," he told parliament.

But he admitted that tax revenues have "probably come in lower than expected".

The OECD expanded by saying the UK's budget deficit risks breaching the ceiling laid down in the EU's Stability and Growth Pact.