The economy is set to contract at its sharpest rate in 60 years in 2009 and the Bank of England (BoE) will need to do more than cut rates to kick-start growth, according to The National Institute for Social and Economic Research (NIESR).

The institute forecasted gross domestic product (GDP) would fall by -2.7% this year, a sharp downward revision from its October prediction for a -0.9% decline. NIESR said the contraction would be driven by a sharp retrenchment in business investment and household spending, and could be worse unless banks resume lending to credit-starved consumers and companies.

The think-tank’s director, Martin Weale, urged the central bank to make more use of measures announced last week to buy up corporate bonds to unfreeze credit markets.

He said: “I felt the last interest rate cut had not very much point to it. This policy, if effective, will be much more effective than a 0.5-1% rate cut.”

The Asset Purchase Scheme, which forms part of the Government’s second bail-out package for banks, also creates a framework for the central bank to expand the money supply to boost the economy if it deems it necessary.

Weale urged policymakers to take such measures sooner rather than later. He concluded: “I can’t see any reason why conventional interest rate changes should be preferred to this sort of policy.”