Mervyn King says low inflation might not always prevail

Asset prices had risen sharply in recent years, the Bank of England Governor said, due to the growth in credit and people taking on more risk.

There was a danger that prices could fall or the price of goods and services could rise to match those of assets.

In each case, meeting the Bank's 2% inflation target could be difficult.

Two scenarios

Speaking to a business meeting in Kent, Mr King noted that interest rates on government bonds and other investments were at a historically low level, citing two possible explanations.

One reason could be the increased level of saving worldwide, driven by leading Asian economies such as China.

Our central view remains one of steady growth and low inflation Mervyn King, Bank of England Governor Bank of England faces policy headache

The other was consumers' willingness to take on more risk without demanding a higher return on their investment.

Mr King questioned whether either factor was sustainable in the long term, arguing that changes in savings and investment patterns could have a significant impact on interest rates and inflation.

"Monetary policy will, therefore, need to be alert to the information contained in a wide range of asset prices, to be forward looking in its aim of maintaining low and stable inflation and to be ready to respond to changes in the signposts," he said.

Risks

The UK economy had picked up after slowing in the middle of last year, Mr King added.

"Our central view remains one of steady growth and low inflation," he said, before adding that there remained "risks" to this scenario.

He has previously highlighted high oil prices as a danger to economic stability.