Bank Governor warns MPs of inflation risks

Sir Edward George has warned that the Bank of England's rate-setting Monetary Policy Committee must be "extremely vigilant" on inflation, though he added that the UK was likely to avoid a recession despite slower growth.

Striking an unexpectedly hawkish note before MPs on the Commons Treasury select committee yesterday, the Bank's Governor said that UK consumer and government spending was supporting domestic demand, which was offsetting the impact of the global slowdown. He said that the MPC had to watch out for the upside risks to inflation, and warned that any sudden fall in sterling against the euro could be inflationary.

However, Sushil Wadhwani, an outside expert on the MPC, told MPs he feared the chances of an economic downturn were "significantly higher" than the Bank's own predictions of 1 to 5 per cent. Mr Wadhwani said he put the risk of recession over the next two years at about 25 per cent. He told MPs he was "much more concerned" about the state of the global economy – and its likely impact on Britain – than the "collective wisdom" of his MPC colleagues suggested.

"I still think the probability of a recession in the UK is significantly lower than 50 per cent, but significantly higher than the projections," he said.

Mr Wadhwani said he thought the 0.5 per cent cut in rates at the MPC's last meeting was not sufficient, but admitted a 0.75 per cent cut "could have caused some concern" because of the economic jitters following the 11 September attacks.

Separately yesterday, new data showed a renewed surge in mortgage lending last month. The British Bankers' Association said home loansjumped almost 9 per cent from £2.21bn, leavingborrowing 60 per cent up on a year ago. There was also a record monthly jump of 21 per cent in equity withdrawal – which is seen as a key support for consumption.