By David Milliken
EGHAM, England, Nov 16 (Reuters) - Britain's economy is moving towards recovery and the Bank of England's latest forecasts show the risk of keeping monetary policy too loose for too long, BoE policymaker Andrew Sentance said on Monday.
Speaking to students at the University of London, Sentance played down official data showing the economy contracted in the third quarter, saying other major indicators suggested an imminent recovery.
The OECD's leading indicator for the UK, he noted, has been pointing to a resumption of growth since the first half of this year and with even more vigour than it did after the recession of the early 1990s.
"It might be argued that this leading indicator is forward-looking, which contrasts with the GDP figures which look back to the past quarter," he said, noting initial gross domestic product estimates were frequently revised and particularly unreliable at turning points in the cycle.
Sentance said his confidence in a recovery was based on evidence of a global upturn, more positive business surveys, a recovery in consumer confidence and signs the labour market is starting to stabilise.
But a synchronised recovery could put strong upward pressure on world energy and commodity prices, and Britain's economy would need to adjust to a period of much weaker government spending.
"The main rebalancing challenge for the UK economy as it emerges from recession is between the public and private sectors rather than the external balance," he said.
FISCAL CHALLENGE
Sentance said Britain did not stand out as a country with a major external imbalance -- and sterling's fall over the past two years would help exporters -- but it did stand out as one of the major countries with the largest public sector deficits.
"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. Sentance said it was likely to take five years or more to get the fiscal deficit down to more comfortable proportions.
However, "as we saw in the 1990s, a sustained fiscal tightening need not jeopardise the prospects for economic growth if there is sufficient support for demand from the global economy, a competitive exchange rate and a recovery in private sector spending," he said.
"The current stand of monetary policy is, I believe, very supportive of private sector spending."
Sentance said the economy had yet to benefit fully from unprecedented monetary stimulus from the past year.
He said the full impact from the cuts in Bank rate -- from 5.0 percent in October to 0.5 percent in March -- were only just coming through in the data, and the lags for quantitative easing were potentially longer and less predictable.
"We have yet to see the potentially significant impact that quantitative easing could have on spending by households and firms, though the financial market effects we have seen so far do suggest that it is feeding through into asset prices and helping to ease funding conditions for businesses."
Sentance said over the months ahead the BoE's Monetary Policy Committee would need to assess whether the signs of recovery were sufficiently well-established to remove the need for further stimulus from additional money injections.
The central bank's quarterly projections last week showed inflation moving above target beyond a two-year horizon if policy remained unchanged.
"As we look further out, therefore, the Inflation Report projections are highlighting the risk of keeping policy too loose for too long," he said.
(Editing by Ruth Pitchford)