Barker sees downturn risks outweighing inflation fears

By Matt Falloon

LONDON (Reuters) - The danger of a sharp economic downturn is more worrying than rising inflation, but the case for an immediate interest rate cut is not compelling, Bank of England policymaker Kate Barker said on Tuesday.

The Bank cut borrowing costs by 25 basis points to 5.25 percent this month and signalled in its quarterly inflation report that there may be no more than a couple more cuts on the cards this year, given heightened inflation concerns.

Barker said there was little the Monetary Policy Committee could do now to stop inflation spiking well above the 2 percent target in the short term, and warned that if that surge fed into inflation expectations it could be painful to reverse.

But she struck a slightly more dovish tone than comments from other policymakers this year as the MPC seeks to manage a softer outlook for the economy against surging price pressures.

"My chief concern is the significant possibility of a large downside risk to growth, and therefore to inflation, as the impact of the credit tightening works through the economy," Barker said in a speech in northern England.

"I rate this a little higher than a large upside risk to inflation over the medium term from dislodging inflation expectations on the upside. And the change in credit conditions themselves means that any given level of Bank Rate is somewhat more restrictive."

However, Barker said that though such conditions may point to an immediate case for lowering interest rates, it was "not compelling".

"Beyond the property markets, there are no clear signs of a slowdown," she said. "And a more positive forward scenario can be painted."