Monetary policy alone cannot help the economy avoid some of the worst consequences of the global credit crunch, two key members of the Bank of England's Monetary Policy Committee (MPC) said today.
Sir John Gieve, the Bank's deputy governor, said Britain needed some form of new instrument which
would be more effective in managing the economy.
Referring to interest rates as "a blunt instrument", Mr Gieve said authorities needed "to complement interest rates... with something which is more financial sector specific".
"We need to develop some new instruments, which sit somewhere between interest rates, which affect the whole economy... and individual supervision and regulation of individual banks," he told the BBC.
"We need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand."
The official interest rate, set by the Bank of England, has been cut three times since October, 3 percentage points in all, and is now at a post-war low of 2 per cent.
Tim Besley, another member of the Bank's MPC, wrote in the
Daily Mailnewspaper that interest rates alone were not enough to bring Britain's flagging economy back to life.
"A raft of essential policy measures, beyond what the MPC can do, continues to be targeted towards returning the banking system to normal functioning," he wrote. "This remains a high priority."
"There is no quick or easy fix for where we are now. What we need is a measured approach, combining policies that deal with the challenges collectively.
The Bank of England announces its next interest rate decision on January 8th. Many economists expect it to cut rates to as low as 1 percent following the decisions by the US Federal Reserve and the Bank of Japan to cut their rates to close to zero this month.
The BBC said Gieve also cast doubt on the quality of the financial institutions now in British public ownership - Northern Rock and Bradford & Bingley.
"There are some books - Northern Rock, Bradford & Bingley - which clearly have a level of defaults in them. (I'm) not quite sure how that will balance out against the residual of the capital," he said.
Reuters