RTTNews - Paul Fisher, Bank of England's Monetary Policy Committee member said Friday that there are signs of slowing in the rate of contraction in the economy, but the U.K. should not be complacent. Although it is nice to say the worst is over, there are likely to be bumps in the road ahead with many twists and turns, he said.

Output would probably be lower in the second quarter than in the first and the economy would start to record positive growth over the next year or so, Fisher said in a speech at a business conference hosted by the Coventry & Warwickshire Chamber of Commerce.

The policymaker said, In my view, damage to the supply side of the economy is a key risk we must try to avoid and the deeper and more protracted the recession, the more likely that the potential growth rate will be adversely affected.

Fisher, who is also BoE's Executive Director Markets, noted, I see the major downside risk to output growth facing the U.K. economy as stemming from the difficulties of the financial sector. If the banking sector cannot lend enough, then economic growth could be restrained significantly, he added.

Regarding inflation, Fisher said the rate is likely to continue to fall during 2009 as the effects of easing energy price inflation. As a result of the spare capacity in the economy, downward pressure on prices would possibly continue in the medium term.

A macro prudential policy instrument could help in future to guard against financial market excess and that would be a significant achievement. However, Fisher noted that this could not be enough to guarantee that there cannot be future recessions. The best thing to be done is to make the economy as resilient as possible to mitigate the impact of such shocks.

In an interview to the Financial Times, the Chancellor of the Exchequer Alistair Darling expressed confidence over the prospects of recovery in the U.K. But he said he is also cautious. The failure of other European nations in cleaning up their banks as well as rising oil prices could adversely impact the British recovery, he said.

Earlier in the day, the Bank of England said in its quarterly bulletin that record decline in British house prices have pushed more households into negative equity. The central bank found that between 7%-11% of U.K. owner-occupier mortgagors were in negative equity, that was equivalent to 1.1 million.

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