Risk UK could fall back into recession - Bank's Miles

Shoppers walk past a closing down sign in a shop window in Cardiff, Wales, September 9 , 2009.

LONDON (Reuters) - Britain's recovery appears to have slowed recently and there is a risk the economy could tip back into recession, Bank of England policymaker David Miles said on Wednesday.

In a speech focussed on the impact of tighter bank regulation, Miles challenged the conventional notion that higher capital requirements would necessarily stifle growth, and he argued that the cost of deleveraging was much smaller than some have feared.

"I do not believe that higher capital requirements that are phased in gradually must weaken a recovery or make the task of setting monetary policy more difficult," he said.

Miles is one of the more dovish members of the central bank's nine-strong Monetary Policy Committee, and there was little in his speech to suggest his views had changed.

The economic recovery which looked to be gaining momentum in the first half of last year had slowed, he said.

"There is a risk the economy could fall back into recession, though I do not believe this is the most likely outcome," he said.

Britain's economy grew by a meagre 0.2 percent in the second quarter following six months of stagnation.

Bank policymakers have acknowledged that the recovery is struggling to gain traction and are likely to revise down their growth projections next month.

Earlier this week, Miles' fellow policymaker Martin Weale said there was a real danger that the economy could contract again, though he repeated his call for a pre-emptive interest rate increase to fight inflation.

The weakness of recent economic data has convinced investors that UK interest rates are unlikely to rise before the second half of 2012, despite inflation running at more than double the central bank's 2 percent target.

Miles said inflation was likely to stay significantly above target until well into next year. But he said domestically generated inflation -- the dominant force for inflation over the medium term -- was low and likely to remain so.

"There is little evidence that any rise in inflation expectations has lead to higher wage growth," he said.

Miles, who has done a lot of research on bank regulation and its impact, reiterated that banks should hold significantly more capital to make the financial system more stable and avoid a repeat of the financial crisis.

For the full text of Miles' speech, click on www.bankofengland.co.uk/speeches

(Reporting by Christina Fincher)