More "world coordination" on rates needed

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LONDON (Reuters) - More international coordination of macro-economic policy is needed,, Bank of England Deputy Governor John Gieve said on Saturday.

In an interview with the financial magazine Hedge Funds Review (HFR), Gieve said that what happened in the world economy was "very important to the UK" because it was exposed to international trends.

He acknowledged it was unlikely there would ever be "tight co-ordination" of macro-economic policies and no "world fiscal package," but said he thought interest rate moves like the globally coordinated 50 basis point cut in October would be more frequent in future, according to the HFR report.

"Overall we have seen loose coordination of policy," he said. "I think one of the key lessons of the last 18 months is that we do need better world coordination of macro policies."

The BoE has cut UK interest rates aggressively in the past two months, including a 100 basis point cut last Thursday which brought rates to 2.0 percent -- their lowest since 1951.

Gieve told HFR he would not rule out a zero interest rate, but said the UK was not in that situation at the moment.

British Prime Minister Gordon Brown on Friday urged banks, some of which are being bailed out with billions of pounds of public money, to try to pass on in full the BoE latest rate cut to reduce the cost of borrowing.

Speaking to a parliamentary committee last week, Bank of England Governor Mervyn King discussed the mechanics of monetary policy once rates had hit zero, saying "close coordination" between the government and the central bank was needed.

Gieve said the world economy had changed a lot since the summer of this year and described the global financial turmoil sparked by a collapse in the sub-prime mortgage markets in the United States as a "once-in-a-century financial crisis."

Gieve also told HFR there was a gap between macro-economic policy and the regulation of financial institutions.

"We need some new policy instruments bridging the gap between interest rates and normal regulations to control the financial cycle," he said. "These instruments would relate regulatory capital and liquidity requirements to the state of the overall economy."

Gieve pointed to Spain's system of dynamic provisioning for banks -- whereby capital requirements vary over the economic cycle -- as one effective example.

"While the system did not prevent the Spanish property boom and bust, it did leave Spanish banks in a better position to handle the downturn. I think such a system could play a useful role," he said.

(Reporting by Kate Kelland. Editing by Ron Askew)

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