UK Monetary Policy Committee member Paul Tucker yesterday highlighted the raft of �downside news � to the outlook for demand and for inflation� in the last six weeks, but also warned of the grave danger of fuelling inflation by cutting interest rates.

UK Monetary Policy Committee member Paul Tucker yesterday highlighted the raft of "downside news to the outlook for demand and for inflation" in the last six weeks, but also warned of the grave danger of fuelling inflation by cutting interest rates merely to shore up short-term economic growth.

The Bank of England staffer appeared to tread a fairly fine line in a speech to the Money, Macro and Finance Research Group's 40th annual con- ference at Birkbeck College in London - leaving the door open to a cut in UK base rates from 5% in coming months but seemingly careful not to over-promise on this score.

Although he highlighted a steady stream of downbeat news on the UK, eurozone, US and even Asian economies since the Bank of England's nine-strong MPC produced its last quarterly inflation report, Tucker also noted sterling's recent depreciation would put upward pressure on inflation.

Tucker cited a recent rise in UK unemployment and highlighted potential for worse to come on this front, given how constrained some companies were financially amid the global credit crunch and firms' fears that troubles could last longer than in recent economic slowdowns.

He told his audience: "Quite a lot has happened since our August forecast. In the six weeks or so since the committee's August report was finalised, the signs of weakening in the UK's major trading partner, the euro area, have intensified. Growth appears to be slowing in parts of Asia too. And in the US, the housing market has not yet obviously stabilised, which is probably a precondition for broader recovery there.

"Domestically, the output data have been on the soft side, moving into line with the battery of surveys and the Bank's regional agents. The labour market also appears to have softened, with un-employment rising and fewer vacancies advertised."

Mulling the position on the employment front, Tucker said: "It is perhaps not surprising that, compared with recent slowdowns, there should be less hoarding of labour if firms expect the adverse environment to persist for a while; and with tighter credit conditions, stretching working capital, making it harder for firms to finance the retention of a less-than-fully-occupied labour force."

Tucker, who is executive director of markets at the Bank of England, also highlighted recent signs of easing of inflationary pressures. He said: "In the manufacturing sector, input and output price inflation have edged down very slightly. In the service sector, the data are less timely, though surveys have started to indicate some slowing in the pace of inflation. Commodity prices, not only energy but food too, have continued to fall, perhaps reflecting the effects on global demand of the earlier price rises and the reduction of subsidies by a raft of emerging-market countries."

Tucker noted equity prices had fallen by about 3%. However, less dovishly, he added: "Sterling's exchange rate has fallen, by around 4% since the MPC's August meeting and by about 15% since the beginning of 2007, so that, in sterling terms, the fall in oil prices has been less pronounced over the past month or so."

Summing up all the developments in the last six weeks, Tucker said: "On balance, those developments mostly comprise downside news, since the August Inflation Report, to the outlook for demand and for inflation."

However, appearing at pains not to fuel expectations of an imminent cut in benchmark UK interest rates, Tucker added: "The recent depreciation of the exchange rate has to be offset against that. And headline inflation has reached 4.4%. It will probably rise further. The committee can and will ensure that this is a temporary state of affairs.

"But, for the moment, inflation expectations do continue to flash an amber light."

The Bank has held UK base rates at 5% since April, when it implemented the third quarter-point cut of the current cycle.

Amid the raft of gloomy economic data, and a growing belief that the UK could suffer the two consecutive quarters of falling output that would constitute technical recession, economists now consider a pre-year-end cut in interest rates to be a real possibility.

Tucker yesterday emphasised the MPC "must ensure that the gains of the past 10 to 15 years in stabilising inflation are not frittered away".

And he made no bones about the dangers of inflation. He said: "There is not a comfortable medium-term trade off between growth and inflation. Inflation is just the opposite of a free lunch. If in the interests of sustaining growth in the short run we were to risk letting inflation become established at higher levels, things could easily get out of control as higher medium-term inflation expectations would become embedded. We would then find it much harder to bring inflation back to target, and could well end up having to generate a serious recession to put the genie back in the bottle."

Commenting on the period before the Bank of England was granted independence in setting interest rates in 1997, he added: "The experience of the 30 years before the current regime demonstrated the economic and social costs, to households, livelihoods and businesses, of what that entails.

"The MPC's inflation-targeting mandate is the expression of those lessons that - tragically for millions of people given the chances of getting stuck in unemployment - UK policymakers had to learn. We're not about to give up on the mandate.

"Success in anchoring inflation expectations in line with the target will give us more scope over time to cushion the economy from the adverse shocks to growth, which of course we would want to do when we can, consistent with medium-term stability."