The governor of the Bank of England has predicted that a major pay settlement for fire fighters could lead to an "explosion" in public sector wages.

A double-digit increase could prompt a fresh wave of high wage demands and push up inflation, he told MPs on Tuesday.

"Whatever the justification for the change in the fire service, there will be the tendency to say 'well if it's good for them, why are they a special case, we do just as important work'," said the governor.

"However much one admires what the fire service does you just get a kind of push inflation starting in the public sector but extending then to the private sector too."

He conceded that the FBU was now looking at "more moderate but still very high numbers" but said the effects of a significant increase could damage the economy.

"There has to be a real risk that other elements in the public sector, first of all, would say 'me too', added Sir Eddie.

"That would be very difficult to stop if it were allowed to start."

Britain's central bank chief warned that "you could just see the thing kind of exploding" should employers begin yielding to double digit pay claims.

A public sector pay boom could do more damage to the economy than the chancellor's planned increase in National Insurance rates, Sir Eddie said.

His warning was echoed by Downing Street. The prime minister's official spokesman warned on Tuesday that higher pay would also put jobs at risk.

He added that awarding a large rise to fire fighters without any modernisation could spark a public pay "contagion".

The governor also told the committee that consumer spending is set to slow as house prices and salary increases falter.

Sir Eddie said that it was misplaced to expect that consumer spending can continue to grow at a faster rate than the economy as a whole.

"In the end it is difficult to see how this can be sustained for ever," he told the Commons Treasury affairs committee.

The bank chief said that stronger than expected growth in incomes and assets such as house prices had boosted high street spending.

Whilst consumer spending is growing at four per cent a year, Sir Eddie warned that the economy was growing by just over two per cent annually.

His deputy, Mervyn King, said bank officials "had been surprised" at year-on-year increases in consumer spending.