UK economy could still return to recession

The UK economy is in a tentative recovery but could still fall back into recession, Bank of England policymaker Adam Posen said today, in a sign he is not in favour of tightening policy just yet. In a speech in London , Posen said the economy was trapped between two outcomes: one dominated by budget austerity in Europe, which will hurt growth, and one by recovery in the rest of the world. "If we are fortunate, our present monetary policy stance combined with the UK economy's natural tendency to recover and with sustained global growth outside of Europe will be sufficient to get the UK to the good outcome," he said. "That would result in more inflation overshooting in the interim, given our policy stance, and in that state of affairs I would be only too happy to vote for an interest rate increase." But Posen said he was not sure that was where the economy would end up. "I regret to say that I am not as confident, however, that we will get to that favourable situation, and that much of what determines our outlook will take place beyond our borders and certainly beyond the MPC's (monetary policy committee) remit," he added. Markets showed little reaction to Posen's comments, which reinforced the prevailing view that it would be some time yet before the Bank tightens policy despite one member's call earlier this month to start withdrawing the extraordinary stimulus put into the economy because of the crisis. Posen's fellow MPC member Andrew Sentance voted to raise interest rates from their current record low of 0.5% this month, partly because he is worried by the resilience of inflation, which is running way above the Bank's 2% target. Posen noted that inflation had been turning out higher despite deflationary pressures and said this could not be put down to just one-off factors. "I am forced to consider changes in the anchoring of inflation expectations as the source of the upward creep we have seen in UK inflation of late," he said. But he went on to argue that a slow creep in inflation expectations was not sufficient grounds to tighten policy when the forecasts argued against that.