Bank's King says economy has to slow to cool inflation

By Sumeet Desai and Matt Falloon

LONDON (Reuters) - The economy is slowing and has to do so to help cool inflation, Bank of England Governor Mervyn King said on Wednesday.

In his annual Mansion House speech to City of London bankers, King repeated it was still unclear where interest rates would have to go to get inflation back to the two percent target but said the Bank would take whatever action was needed.

"The rise in commodity prices cannot, by itself, generate sustained inflation in the United Kingdom unless we allow it. We will not. So although inflation in the UK will rise in the short term, inflation will then fall back," King said.

"We believe that a slowdown in the economy this year, creating a margin of spare capacity, will be necessary to dampen price and wage pressures and ensure that we fulfil our remit by returning inflation to the target."

King's comment will offer little comfort to those analysts still predicting an interest rate cut this year, though he noted the economy was already slowing "quite sharply".

Nor was there any clear indication market expectations for higher borrowing costs were about to be validated.

"Where Bank Rate will ultimately need to move to bring inflation back to target is impossible to judge now," he said.

Inflation spiked to 3.3 percent in May -- its highest level since the central bank was given the power to set interest rates and forcing King to pen a letter to the government explaining how he plans to cool price pressures in the economy.