LONDON (Reuters) - Above-target inflation in Britain is mainly due to temporary factors that are masking the downward pressure being exerted by post-recession spare capacity in the economy, Bank of England Governor Mervyn King said yesterday.

King, in a letter explaining why inflation was still more than one percentage point above its two percent target in July, said there was a "significant probability" that he would continue to have to explain above-target inflation for a while.

However, he reiterated the Monetary Policy Committee's central view that inflation would fall so that in the medium-term it would be "close to, or a little below, the target".

"That is consistent with the current low rate of pay increases, little growth in broad money and credit, generally stable inflation expectations and the most likely prospect being a muted recovery in demand," King said.

King said the MPC stood ready to either expand or reduce its monetary stimulus, an approach welcomed by finance minister George Osborne in a written reply.

Official data yesterday showed inflation slowed to 3.1 percent in July from June's 3.2 percent — the lowest since February but the eighth consectutive month it has exceeded the BoE's two percent target.

Under the BoE's remit, King has to write an open letter to the government when inflation is more than percentage point above or below target. He then has to write a new letter if the deviation has persisted three months later.

This is King's third letter this year.

King said the MPC had been surprised by the recent strength in inflation but argued one-off factors such as January's hike in VAT sales tax, past rises in oil prices and the continued effects of sterling's depreciation since 2007 were largely to blame.