In a speech at a monetary policy and markets conference in London, Monetary Policy Committee member Mr Sentence said that even if there is recovery beginning in the second half of 2009, as suggested by the Bank’s November Inflation Report, the situation is most likely to mirror previous recessions where the economy fell by at least 2.5 per cent over a period of a year or more, which resulted in a “significant rise in unemployment.”

He argues that although the MPC has already delivered a significant easing of monetary policy, it will take some time to have an affect, but that the Bank of England remains focused on countering the fallout from the global economic crisis.

“In the short-term, the monetary policy challenge is clear,” he said. “To act to counter the negative impact on demand from global slowdown and banking crisis, and to head off the potential deflationary risks created by an emerging large margin of spare capacity.”

According to a report published today by The National Institute of Economic and Social Research, the UK economy shrank by one per cent in the three months leading up to November, and is likely to contract even more in the quarter through December.

Last week, the MPC cut the interest rate from three per cent down to two per cent, having already cut it the previous month by a massive 1.5 per cent, from 4.5 per cent to three per cent; it is now at its lowest level since 1951.

Following these dramatic cuts, economists are predicting further reductions, down to one per cent or even zero. Although Sentence made no comment on whether or not the base rate would dip that low, he said that the recent cuts had moved the goalposts of the measures the MPC will take.

He said that in the long term, there need to be better policy instruments for maintaining the stability of the financial system, but doesn’t think it is reasonable to expect monetary policy to create these unaided.

“This would create confusion about the objectives of monetary policy and would be very difficult to operate in practice.” he said. “We need to take time to decide what a new regime for regulating the financial sector looks like,”

Meanwhile, Tory leader David Cameron has criticised the way the financial crisis has been handled by the Government, saying he would not match Labour’s new spending plans for 2010 and beyond.

While the Chancellor accused Mr Cameron of “unbelievable complacency”, as he announced he would actually cut spending, Cameron hit back saying cuts are needed because of “the mess Labour have made.”

But Liberal Democrat leader Nick Clegg says that both have got it wrong: “people desperate for help in these tough times will be amazed by David Cameron’s determination to do nothing while Gordon Brown borrows billions of pounds to do the wrong things.” he said

Mr Clegg said that instead of a VAT cut that will “be here today and gone tomorrow”, additional borrowing should be used for things like insulating homes, building social housing and reopening rail lines, while “big, fair and permanent tax cuts for people and families who need it most” should be made “by closing tax loopholes that only benefit the very wealthy.”

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