A leading figure in the Bank of England has said interest rates should be cut gradually despite the risk of slackening the economy.

BoE's executive director for markets, Paul Tucker, said the risk of inflation prevented the central bank from lowering the base rate sufficiently to completely offset the impact of deteriorating credit conditions.

This means central bank policy would be to "offset some but not all" of the credit crunch's impact - indicating that rate setters are treading a fine line between keeping inflation in check and protecting the economy as a whole.

Meanwhile in the United States, Ben Bernanke, chairman of the Federal Reserve, has admitted for the first time that a recession is "possible".

He told a committee in Congress that the US economy will not grow much during the first half of this year.

"It now appears likely that gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly," Mr Bernanke told politicians.

GDP measures the value of all goods and services produced within the US and is the best barometer of America's economic health. Under one rule, six straight months of declining GDP would constitute a recession.

Mr Bernanke said a recession is possible, but he also said he expected more economic growth in the second half of this year and into 2009, helped by the government's £88bn stimulus package of tax rebates for people and tax breaks for businesses as well as the Fed's aggressive reductions to a key interest rate.

"Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year," he said.

But although Mr Bernanke hopes inflation will moderate in coming quarters, he acknowledged that high energy prices had clouded the inflation outlook, adding: "We are fighting against the wind."

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