Bank of England rate-setter admits to sleepless nights

Worries over a double-dip recession caused by savage belt-tightening across major economies have given Bank of England rate-setter Adam Posen sleepless nights, he admitted today.

A squeeze on ballooning deficits through austerity moves in the Eurozone - the UK's biggest trading partner - will "hurt", the Monetary Policy Committee (MPC) member said.

Mr Posen said he had "laid awake for a number of nights" pondering the risks of too-swift spending cuts and tax hikes - such as the huge clampdown unveiled by British Chancellor George Osborne in the recent emergency Budget.

But the dire state of the UK's public finances gave the country little room for manoeuvre on cutting borrowing despite the risk of moving too rapidly, he added.

He warned: "For the UK specifically... there may simply be no choice - the structural budget deficit is now too large, the state share of the economy has become too high, and the risk of savings leaving our markets remains very small but still too great."

Mr Posen has shown a colourful turn of phrase since joining the committee, and once compared quantitative easing to "driving a 10-year-old used Vauxhall Vectra with a cranky transmission".

He added today: "The UK economy is potentially switching between two states - a recovery, which we are now in, albeit perhaps an initially weak one... and the renewal of a severe recession if not outright deflation."

His comments reveal the splits opening up on the MPC after committee "hawk" Andrew Sentance made a shock vote for a rate hike this month, the first call for a rate rise in almost two years.

If the UK achieves a weak recovery, the result will be a gradual rise in inflation because the emergency measures needed to salvage the economy - record low interest rates and a £200bn (€244.6bn) boost to the money supply - will be too loose, Mr Posen said.

He added that he would be prepared to vote for a rate hike if the UK recovered via sustained growth from outside Europe, but said he was "not as confident" that this would be achieved.

Fellow rate-setter Paul Fisher also warned against "stifling the nascent recovery" with premature rate hikes yesterday. IHS Global Insight's Howard Archer said neither Mr Posen nor Mr Fisher seemed ready to support rate rises in the near future.

He added: "It seems highly likely that the Bank of England will keep interest rates down at 0.5% at the conclusion of their July meeting on Thursday week.

"Indeed, we still lean towards the view that interest rates will stay down at 0.5% through 2010, although we accept that a modest, token rise is possible."

Mr Posen was speaking at the annual conference of the Society of Business Economists in London.