Governor Mervyn King claimed the rate of inflation could rise above 3% in the coming weeks, before quickly falling back below the 2% target.

King also claimed that the Bank’s £200bn quantitative easing programme had helped economic recovery and he would not rule out further injections of liquidity, despite putting the asset buying scheme on hold earlier this month.

However, he did rule out extending the special liquidity scheme for ailing lenders and said the Bank was working with the FSA and individual banks to ensure they had schedules in place for refunding the money.

Presenting the report, King said: “The UK economy has continued to bump along the bottom, but a gradual recovery may now be in prospect.”

Liberal Democrat shadow chancellor Vince Cable said: “It’s clear that the British economy is in a very weak position and will be for some time to come. Sluggish growth and comparatively high inflation are a serious concern.

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“With growth still weak, it would be foolish to slash spending now and risk pushing the economy back into recession. In this climate, it is essential that decisions about the speed and timing of tackling the deficit are based on the state of the economy.”