The Bank of England must guard against keeping interest rates too high for too long and from tipping Britain's economy into a slump as it fights to curb inflation, one of its most influential officials says today.

The warning that the Bank must strive to avoid interest-rate overkill, from Kate Barker, the longest-serving external member of its Monetary Policy Committee (MPC), will dampen City speculation that rates will be raised soon to combat rising inflation.

Britain should escape a severe recession, such as those suffered in the early 1980s and early 1990s, Ms Barker told The Times, after a barrage of grim economic news in the past two weeks. However, she emphasised that the stakes were quite high over risks that the Bank could make a grave error as it tried to steer a course between the conflicting pressures of rapidly weakening growth and fierce inflationary pressures.

After the Bank's hardline decision last week to hold rates despite a blizzard of dire economic figures, Ms Barker's message that the MPC is alert to the danger of taking too tough a stance will trigger a rapid rethink by markets that are betting on a rate rise by autumn. “The mistake we could make, and we are all worried about this, is of holding policy too tight, and the economy weakening more than is necessary to get inflation back on target,” she said.

Ms Barker made clear that the Bank remained committed to pushing consumer price inflation, which rose to 3.3 per cent in May and is set to climb still higher in June figures tomorrow, back to its 2 per cent target.

Yet as it pursues its campaign to quell inflation, she insisted that the MPC would not keep rates at levels that would make an excessive economic downturn inevitable. “The worst mistake we could make, very clearly, is to allow inflation to get out of control,” she said. “We could avoid that in the short-term by holding policy really tight and really acting as ‘inflation nutters'. But we are not doing that.”

Although keeping interest rates too high would allow the Bank to hit the 2per cent inflation target sooner, Ms Barker argued that if the price of this were economic slump, “I don't think that would redound to our credibility, either”. The risk of overkill was one that weighed very heavily, she said.

Ms Barker's comments will command attention in the markets because she is seen as a pivotal figure on the rate-setting committee who often is a crucial “swing voter” between its more hawkish and doveish camps.

She admitted that she had felt heightened pressure over the Bank's rate decisions in recent months as threats to the economy had increased, and was braced for attacks if conditions deteriorated badly. “I have certainly agonised more ... absolutely, because the risks are bigger,” she said. “A rather interesting stimulus comes when people criticise you - that can be very salutary. It makes you think: ‘Am I doing the right thing?'”

Ms Barker cautioned against excessive gloom, arguing that the reaction to a deluge of bad news “is somewhat overstated”, and that the worst fears for the economy were probably exaggerated. She said: “What are people really concerned about when they talk about recession? I guess they are concerned about something like the early Eighties or early Nineties, and at present I don't think that something like that is very likely.”

Among brighter signs, she pointed to still high employment and stronger exports. She argued that consumer spending may be in better shape than recent grim trading news from retailers such as Marks & Spencer has implied and that strong official figures from retail sales, questioned by the City, may not be as misleading as critics think. She added: “There may have been some life in retail sales in the second quarter.”

Ms Barker, an expert on the property market, accepted that the fall in house prices was “probably very sharp”. However, she backed the Bank's insistence that the knock-on effect on consumer spending should be limited and argued that there were some welcome aspects to falling house prices. “There has been a rather unhealthy expectation about the housing market, that prices were on a perpetual rise, a one-way bet,” she said.

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