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UK is still not out of the woods says King

Bank of England Governor Mervyn King yesterday warned that a sustained UK recovery was still uncertain despite the economy's recent growth.

He also cautioned that inflation would remain high throughout most of 2011 in a further blow to households facing rising living costs.

Mr King told the Treasury Select Committee that a 1.1% output rise between April and June was "encouraging" but added that a gradual improvement in credit conditions "seems to have come to a halt".

"The wider economic problems around the world underline the fact that we cannot be confident that the recovery in demand, output and employment here in the UK will be sustained," he said.

The Governor stressed that there was a "considerable distance to travel" before interest rates - currently at 0.5% - were back at typical levels. "The debate is about the appropriate degree of stimulus, not about applying the brakes," he said.

Pressed by committee chairman Andrew Tyrie on whether Chancellor George Osborne's savage emergency Budget had increased the chances of a further slump, the Governor said: "I don't think it made a significant difference to whether we get what is technically known as a 'double-dip' recession."

Mr King said the Bank's Consumer Price Index inflation benchmark had been high for most of the past four years and would likely stay above the Government's 2% target for "much of next year" - largely down to the Chancellor's VAT hike to 20%.

MPs also questioned Mr King on whether the Bank was doing enough to help encourage lending to small businesses to aid the recovery.

Mr King said there was little the Bank could do, as the banking sector was struggling to meet higher requirements on capital strength imposed in the wake of the financial crisis. But he sent out a warning shot to banks ahead of next week's start of the half-year reporting season, saying they should put capital strength ahead of bonuses and dividends.

"It would be better for all concerned if there was less emphasis on distribution - whether in compensation or dividends - and more on building up their balance sheets," he said.