Alistair Darling and Mervyn King last night delivered the bleakest official assessments of economic prospects for 15 years in what the Bank of England governor said was 'the most challenging period' since 1997.

Again warning households to prepare for 'average real take home pay [to] stagnate this year', King used his annual Mansion House speech to City grandees to predict that “the squeeze on real income growth is likely to mean that both house prices and consumer spending weaken together”.

In turn, the chancellor conceded that his Budget forecasts would not be met, accepting that inflation would be higher than predicted and that no country could escape the effects of higher inflation on real incomes and economic growth.

Both Darling and King stressed the need for wage restraint. The chancellor insisted “inflationary pay settlements would undermine rather than raise people’s living standards” and the Bank governor warned that an economic slowdown “will be necessary to dampen price and wage pressures”.

Financial Times