SIr John Gieve, the outgoing Bank of England deputy governor, has raised the possibility of further interest rate rises in order to control inflation.

His comments will be a blow to business groups. The bank held interest rates at 5 per cent following last week's rate-setting meeting, despite pleas for a cut to combat the current economic slowdown.

The bank must balance the need to prevent Britain from falling into a recession with its task of returning interest rates to the 2 per cent target level. The Consumer Prices Index (CPI) annual inflation index rose to 3.8 per cent in June, almost twice the target.

Sir John said today that he expected the CPI annual rate to be well over 4 per cent for much of the remainder of 2008. He said: "The Monetary Policy Committee will continue to assess the balance between the risks of higher inflation from the commodity cost shock and the downside risks to output (and to inflation in the medium term) from the credit crunch."

He said that there were signs that the downturn in the housing market was hitting consumer confidence, reducing both consumption and investment.

"Most importantly, the sharp increases in commodity prices are squeezing real take-home pay, which is bound to have an impact on consumption at some point," Sir John said.

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