King: Euro area shocks 'could be worse than you imagine'

Bank of England governor Mervyn King has accepted UK economic growth will be flat over the next six months and has given a stark warning about potential shocks from the eurozone.

His comments came while giving evidence before the Treasury Select Committee on the Bank of England's latest Inflation Report, along with other members of the Monetary Policy Committee.

"What we are facing is a situation where painful adjustments need to be made, irrespective of how the euro crisis plays out," he said.

"I don't see much point trying to speculate about the worst case. It is always possible to find things, as they pan out, that are even worse than you could imagine."

He went on to warn there were "early signs of a credit crunch" in Europe because of the continuing deleveraging of banks in the region.

King also accepted the eurozone crisis was affecting the economic recovery in the UK and, in a written submission to the committee, predicted the "level of output will be broadly flat over the next six months".

Yesterday, the OECD forecast contractions in GDP in the UK for Q4 of this year and Q1 of 2012.

In its latest quarterly Inflation Report, the Bank predicted consumer prices index inflation could fall to 3% by the end of Q1 2012 as the impact of the VAT hike and high oil prices falls away.