The cost of importing gas could hit UK firms

Appearing before the Treasury Select Committee, Mr King said the bank's Monetary Policy Committee (MPC) would be monitoring prices "very carefully".

Wholesale prices are at a nine-month high while spot prices have risen sharply amid fears of supply shortages.

Mr King said it was difficult to tell how price rises may affect the economy.

Specific concern

Employers organisations have warned that heavy users of gas - including many manufacturers - could face real problems this winter, potentially affecting economic growth.

The position on gas prices in the UK is something we will have to watch very carefully Mervyn King

The MPC - which sets UK interest rates - would consider the impact of gas prices as part of its thinking on inflation, Mr King said.

"The position on gas prices in the UK is perhaps a rather specific issue to the UK unlike the movement in oil prices and that is something we will have to watch very carefully," he said.

"If there were to be cutbacks to industry and that were to affect the growth of output that would be a supply side effect that we would have to take into account."

Oil impact

Being questioned by MPs for the first time since the MPC cut interest rates to 4.5% in August, Mr King said there was continuing uncertainty about the impact of high oil prices on inflation.

The MPC was mindful, Mr King said, that the impact may not have been fully felt yet and could fuel further pressures next year.

"If that were to materialise - and I stress 'if' because it is not our central view and it hasn't come to pass yet - that is one of the upside risks and we would have to respond," he said.

"If we see the upside risks materialising then policy might need to be tightened."