Central banks and governments must be prepared to take further action including interest rate cuts to fight the credit crisis and recession that threaten the global economy, John Gieve, the deputy governor of the Bank of England, said last night.

Central banks and governments must be prepared to take further action including interest rate cuts to fight the credit crisis and recession that threaten the global economy, John Gieve, the deputy governor of the Bank of England, said last night.

In a speech to the Euro-pean Business School in London, Gieve said that despite measures taken in the last few months such as co-ordinated cuts in the cost of borrowing by the US Federal Reserve, the Bank of England, the Bank of Canada and the European Central Bank, the outlook for 2009 is bleak and "the prospects beyond are uncertain".

He said credit markets are still not functioning properly - a view taken by Fed chairman Ben Bernanke earlier this week - and investors' confidence remains fragile.

"Overall, there has been some easing in the money markets and some repair in confidence. The complete seizure (in the world financial system) has been averted," Gieve stated.

"However, we are clearly not out of the woods yet. Financial markets across the world are still badly impaired; spreads have not yet returned to summer levels; and while banks look more secure, many hedge funds for example are under increased pressure.

"In the wider economy, we are only in the early stages of a recession in the advanced economies and of the slowdown in the emerg- ing markets. So we must be ready to take further action if required whether monetary, fiscal or directly in the financial sector."

Gieve went on to say there is a need for policy to be co-ordinated on an international level and called for some "new policy instruments" along with action on interest rates to stabilise the global economy, Earlier, Prime Minister Gordon Brown said further measures may be needed to encourage banks to resume a normal flow of credit to small British businesses and homeowners.

Brown came under pressure from Opposition politicians who complained that the government's £37bn recapitalisation programme for banks had not yet eased the flow of credit.

He said the government was monitoring banking activity, and meeting frequently with bankers to try to resolve issues which continue to restrict credit during the global financial crisis. "We are ready to take further measures if necessary," Brown stated.