Bank's Posen sees inflation down by summer 2012

Fruit and vegetables are seen for sale in Soho's Berwick Street Market in central London May 17, 2011.

LONDON (Reuters) - Bank of England policymaker Adam Posen said on Sunday he expected Britain's inflation rate to fall by the summer of 2012, and that interest rates would remain at a record low level.

Posen, who repeated his long-standing call for more asset purchases, also warned a failure to solve the debt crisis in the euro zone would hit Britain hard, and that the Bank was working to assess any impact.

"I've been saying since ... last year that (inflation) would peak some time ... this year, and I've been saying it would come down by summer 2012, and we're on track for that," Posen told Sky News.

Inflation stands at 4.5 percent, twice the Bank's target, but Posen said that because wages were not growing and export prices had stopped rising due to sterling's stability, it was not a problem.

"I don't really see the inflation threat. If inflation were to get bad it's pretty easy for us to take it down," he said.

"These temporary moves in inflation, while they're real for British households, they're not a good forecast for what we have to do for the economy as a whole."

Posen added he did not see the Bank raising interest rates from 0.5 percent, where they have been since March 2009, as the British economy makes a lacklustre recovery from recession. He described the risks to the economy as "pretty grim."

"We're not going to be moving interest rates, at least I don't think we are. There's not much room to go there," he said.

Economists now assess the Bank is more likely to heed Posen's call for further quantitative easing to boost the faltering economy.

Posen also warned a failure to solve the euro zone crisis would have a severe impact on Britain.

"There's no avoiding it. It is the biggest single threat to the global economy," he said.

"It is bigger for the UK than for the US or for other people who are not as tightly tied to Europe. We're all tied to western Europe, we're all tied financially, politically, economically, commercially."

He said Bank of England Governor Mervyn King, his deputy Paul Tucker and others were working "very hard to make sure we know where all the linkages are" and banks were as well capitalised as they could be.

"But that's the best we can do. If something terrible happens in the euro area, it will be very hard for the UK and the rest of the world," he said.

He added Europe's debt problem was solvable and the rich countries of central Europe should take the loss to alleviate the fear across markets.

"Is that entirely fair? No, but it's not as unfair as people think, given that the rich countries in central Europe were the ones who lent the poorer countries the money," he said.

"It also doesn't, in the end, matter whether it's fair or not because they're going to be the worst off, except for Greece, if things go wrong."

(Reporting by Michael Holden; Editing by David Hulmes)