Gauging the strength of Britain's recovery will be difficult for some time and measures are needed to temper "exuberance" in the banking sector, the Bank of England's deputy governor said in an interview on Thursday.
Deputy Governor Paul Tucker also told the Scotsman newspaper that expanding the BoE's 175 billion pound asset purchase scheme was an option for policymakers if deemed necessary.
"The great challenge now is that for some considerable time it will be hard to tell whether we face anaemic growth or if we are facing above-trend growth," Tucker said. "A great deal will depend on the rest of the world."
Asked if the BoE could expand quantitative easing if it felt it needed to do so, he said: "It would be possible and it would happen."
Minutes from the BoE's most recent policy meeting earlier this month noted there were still risks to growth from fragility in the banking sector as well as uncertainty over the global recovery, in particular whether better Asian demand would offset subdued U.S. consumer spending.
At its recent meeting, Monetary Policy Committee members voted unanimously to keep interest rates at a record low of 0.5 percent and maintain the size of its quantitative easing (QE) programme.
Most economists expect Britain to have emerged from recession in the third quarter after more than a year in decline.
But weak industrial output figures have raised doubts among some that gross domestic product data, to be released on Friday and which economists expect to show a 0.2 percent quarterly increase, may turn out weaker than expected.
The Bank will issue new growth and inflation forecasts in November.
"We're a bit sceptical that the MPC is about to signal another increase in QE purchases — everything is going to hinge on the inflation projections in next month's Inflation Report," said Philip Shaw, chief economist at Investec.
REGULATION
In the interview, Tucker also said the regulatory regime governing the banking system needed to be less pro-cyclical and should not create unwanted side effects.
"From somewhere in the world, there will be periods of exuberance and we need instruments that can help temper that exuberance," Tucker said.
Policymakers have differed publicly over how to regulate banks, with BoE Governor Mervyn King and Prime Minister Gordon Brown disagreeing over whether splitting banks' investment and retail banking divisions would help avert another financial crisis.
Earlier this week, King said banks should not be allowed to become so large they cannot be allowed to fail and suggested separating core aspects of banking from riskier activities to reduce the risk of a bank failure jeopardising the financial system.
Prime Minister Gordon Brown, however, dismissed King's view, saying the financial crisis was caused by insufficient global regulation and not due to banks combining their retail and investment activities.
