The Bank of England was ambushed by the severity of the recession and failed to realise what was happening to the economy, according to Deputy Governor Sir John Gieve.

He also claims interest rates are failing as a tool to control the economy, and new methods are needed.

The Bank cannot just rely on interest rates to control the economy, he argues.

“One of the main lessons from this is that we need to develop some new instruments which sit somewhere between interest rates, which affect the whole economy and activity, and individual supervision and regulation of individual banks,” Gieve said, talking on BBC TV’s Panorama.

“Maybe 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. I think we need to complement interest rates, which are a blunt instrument – you set one interest rate for the whole economy – with something which is more financial-sector specific.”

Speaking on the same programme, John Varley, chief executive of Barclays Bank, predicts credit will be tough to obtain for the next one to two years.

Across at BBC Radio 4, International Monetary Fund head Dominique Strauss-Kahn backed Gordon Brown’s recession strategy yesterday by urging governments to shore up their economies with more or face a worsening downturn.

“Our forecast, already very dark and will be even darker if not enough fiscal stimulus is implemented,” Strauss-Kahn.

In an implicit backing of Brown’s £20 billion stimulus plan, Strauss-Kahn said he had reversed his view of state borrowing and believed that increasing government debt was the “less bad solution” – nevertheless he felt the world’s leading countries need to pump at least £800 billion to start moving out of recession.

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Tags: Bank of England, Banking, BBC TV’s, Gordon Browns, Monetary Fund, Panorama, Sir John Gieve, Strauss-Kahn