LONDON (Bloomberg) - Bank of England (BoE) Governor Mervyn King said the housing market will be "extremely weak" and that policy makers will not "overreact" to record inflation, suggesting they are in no rush to increase interest rates.

"We're likely to see a period of extremely weak activity" in the housing market, Mr. King told lawmakers in testimony to the Treasury Select Committee yesterday. "It would not be sensible to overreact" to the surge in oil prices, which will lift the consumer price index for the next year.

After cutting interest rates three times last year to head off the risk of a recession in the UK, the bank's Monetary Policy Committee (MPC) is now considering when it must raise them again to contain inflation risks.

"The MPC as a whole is trying to keep its options on rates open," said Malcolm Barr, an economist at JPMorgan Chase & Co. in London. "The drift in the direction of some decidedly hawkish themes is clear. All those on the panel recognised that there was a case for raising rates."

Mr. King said there is a risk that slowing economic expansion will bring inflation too far below the central bank's target next year. While four policy makers testifying with King said they considered increasing interest rates this month after inflation reached a decade-high, a move may also exacerbate the economic slowdown.

"It's not sensible to bring inflation back to target in the next six months," Mr. King said. "That would lead to a deep recession and that would be silly."

Consumer prices jumped 3.3 percent in May from a year earlier, the most in more than a decade, and Mr. King said yesterday the rate may exceed four percent later this year.

The BoE predicted last month that the annual rate of economic expansion will drop to around one percent, the lowest since 1992.

House prices declined by the most this year in June as buyers shunned the market, Rightmove plc. said this week.

Property values may fall nine percent this year, according to HBOS plc., Britain's biggest mortgage lender.

Yesterday's comments "suggest that the Bank of England is in no hurry at this stage to move interest rates", said Howard Archer, an economist at Global Insight in London.

"If the Bank of England does change interest rates in the near term, it will be to raise them."

Policy makers John Gieve, Timothy Besley, Paul Tucker and Kate Barker, who testified with Mr. King yesterday, all said they had considered a vote for higher interest rates this month.

The nine-member panel voted eight-to-one to keep the main rate unchanged, with David Blanchflower in support of a reduction.

Faster inflation is prompting central banks around the world to consider raising interest rates even though economic growth is slowing. Romania's central bank raised its main rate to 10 percent yesterday.

The Reserve Bank of India lifted rates earlier this week and signaled more increases to come.

The US Federal Reserve said yesterday that "upside risks" to prices had picked up as it left its main rate at two percent.

The UK benchmark stands at five percent, the highest among Group of Seven countries.

Mr. King reiterated that economic growth needs to cool to bring inflation under control.

"The economic slowdown will need to be sufficient to ensure that inflation does not persist above the target," Mr. King said.

"But at the same time, we need to avoid a slowdown that is so pronounced that it would pull inflation down, not just to the target, but below."