Gieve says further cuts may be needed

LONDON (Reuters) - The Bank of England may need to cut interest rates further because inflation is likely to fall below target over the medium term, Bank Deputy Governor John Gieve said on Wednesday.

Gieve also personally endorsed three reforms to bank capital regulation, including a Spanish-style model of capital requirements which vary over the economic cycle.

Bank of England minutes published earlier on Wednesday showed the nine members of its monetary policy committee voted unanimously when they cut rates by 1.5 percentage points at the start of the month, and discussed an even bigger move.

The Bank's quarterly inflation report last week forecast that inflation could fall well below the bank's 2 percent target next year, and Gieve said this meant more rate cuts could be needed.

"Our latest medium term projections for inflation show inflation remaining below target in the medium term and suggest further reductions may be necessary. Of course, there are large uncertainties around that projection; more so than usual," he said in the text of a speech at Regent's College, London.

Most economists expect the Bank to cut rates by another half percentage point in December, with further easing in early 2009.

Gieve said central bank action to ease money market tension during the past year's credit turmoil had staved of a complete lending crisis, but had far from resolved the situation.

"The complete seizure that was looming has been averted. However, we are clearly not out of the woods yet," he said.

Longer term, banking regulation needed reform so that banks were hurt less by swings in the business cycle, and also did not exacerbate economic volatility themselves, Gieve argued, giving his personal support to proposals similar to those in the Bank's latest financial stability report.