Bank deputy says rates may rise

LONDON (Reuters) - Official UK interest rates will need to rise before any economic recovery is felt on the ground to stave off the risks of an inflationary surge, former Bank of England Deputy Governor John Gieve said.

"We've got to hold on to the fact that inflation will be kept low," Gieve said in an interview with the Sunday Times.

"That will require some very difficult decisions because it will require the Bank to start raising rates before it is obvious on the street that the economy is getting better."

Gieve, who ended his three-year brief overseeing financial stability at the central bank on Friday, said policymakers needed to be wary of keeping rates too low for too long, which could fuel inflation when the recession finishes.

"When the recession does come to an end, will we overshoot the inflation target?" he said.

"I don't think it would be the worst thing in the world if we overshot it a bit, but I don't want to turn this into a 1970s experience of really high inflation followed by savage measures to bring it under control."

The Bank has slashed interest rates to a record low of one percent from five percent since October and is expected to trim borrowing costs to 0.5 percent this week before embarking on a policy of quantitative easing, or boosting the money supply.

Authorities hope those extraordinary measures, along with the government's extensive support package for banks and a 20 billion pound fiscal stimulus, will breathe life back into Britain's fast-shrinking economy.

Gross domestic product shrank by 1.5 percent in the three months to December -- the fastest pace of contraction since 1980 -- and is expected to keep shrinking much of this year.