A member of the Bank of England’s rate-setting committee said last night that the economy had emerged from recession in the quarter between July and September, contradicting initial figures published by the Office for National Statistics (ONS).

Andrew Sentance said that a wide body of evidence “suggests the UK economy has moved on to a recovery track and growth has resumed in the second half of this year”.

The ONS confounded economists last month when it said that GDP had fallen by 0.4 per cent in the third quarter. Analysts had expected GDP to rise by about 0.2 per cent, marking an end to the recession. The ONS will issue more detailed figures this month that could lead to a revision of the headline GDP figure.

“I would not take a negative signal from the decline recorded in the third quarter — which may change, anyway, as a result of data revisions,” Dr Sentance said. But he added that public finances needed to be repaired.

“A very significant fiscal tightening is necessary to rebalance the UK economy ... cutting the government deficit will be a major challenge for the British economy as we move through the coming recovery phase of the economic cycle,” he said.

He warned that tax rises and spending cuts could dampen private spending, curbing the speed of the recovery.

The Treasury is under increasing pressure to outline how it plans to cut the public debt — which has soared to a record 59 per cent of GDP — in next month’s Pre-Budget Report.

Dr Sentance also said that a coordinated global recovery could force up commodity prices, prompting a “surge” in inflation.

Meanwhile, Paul Tucker, the Bank of England’s Deputy Governor for Financial Stability, has urged investors to consider purchasing contingent convertibles, or so-called CoCos, the newly created form of hybrid debt, to make financial markets less risky.

Mr Tucker said that there was a case for institutional investors holding the instruments to shore up the banks and, in doing so, protect the value of other assets held in their portfolios. His comments come days after Lloyds Banking Group raised the value of CoCos that it is issuing in a fundraising from £7.5 billion to £9 billion in order to meet demand.

Speaking at the Belgian Financial Forum Conference in Brussels, Mr Tucker said that CoCos — a form of debt that converts into shares if a bank runs into trouble — could prove to be “a form of catastrophe insurance provided by the private sector”. He added: “Why should long-term savings institutions and asset managers be prepared to provide such insurance? One possible reason is that if enough of them were to do so for enough banks, it might well help to protect the value of their investment portfolios more generally. If ever it needed to be demonstrated, the current crisis has surely put it beyond doubt — not only for our generation but for the next one, too — that serious distress in the banking system deepens an economic downturn and so impairs pretty well all asset values.

“By taking a hit in one part of their portfolio by providing equity protection to banks, institutions might well be able to support the value of their investments more widely.”

Mr Tucker also confirmed that the Bank would consider forcing banks to show that they can produce daily details of their positions in derivatives — often seen as the most risky of their investments — by mimicking US rules.

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