Bank of England Governor, Mervyn King, has renewed his warning to the government that it must cut the public deficit. Mr King said uncertainty about the government's intentions had a direct bearing on monetary policy. He said "a key element in raising the national saving rate is the elimination over time of the structural deficit in the public finances."

Mr King also warned that inflation was "likely to pick up markedly in the first half of this year."

Referring to the public deficit, he said: "Of course, there is a perfectly sensible debate about the appropriate timing of the withdrawal of the temporary fiscal stimulus as the economy recovers.

"Some has, in fact, already been withdrawn with the return of the standard rate of VAT to 17.5% at the beginning of the month. "But uncertainty about how and when fiscal policy will respond has a direct bearing on monetary policy. And markets can be unforgiving."

During his speech, Mr King quoted the US Federal Reserve Chairman Ben Bernanke. Speaking about the fiscal position in the US, Mr Bernanke said: "Near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances.

"Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth."