(adds more detail)
By David Milliken
LONDON, Oct 28 (Reuters) - The British economy is set to weaken further but interest rate cuts are not a magic bullet as consumption may not respond to changes in borrowing costs, Bank of England policymaker Tim Besley said on Tuesday.
In a speech to bankers, the Monetary Policy Committee member said the credit crunch had impaired the normal way in which monetary policy can affect the economy and so a variety of policy responses were needed to deal with the global shock to the financial system.
"Many forward-looking indicators of economic activity have moved further to the downside, suggesting that activity in the UK economy is set to weaken further," said the arch-hawk who only in August had wanted to raise rates.
But he added that it was important that the right instruments were used.
"A cut in Bank Rate on its own will not be a magic bullet. No single instrument can work to achieve all goals."
The BoE cut interest rates by 50 basis points in an emergency move last week and is expected to cut by the same amount again next week to shore up an economy which shrank for the first time in 16 years in the three months to September.
Besley noted that upside risks to inflation had diminished since last summer as commodity prices had eased but said sterling weakness -- the pound fell to a 6-year low versus the dollar last week -- would push up inflation.
It would also, however, curb people's living standards as Britons were forced to pay more for imported goods.
He said part of the reason for the pound's decline was investors wanting more of a risk premium for holding British assets.
"Movements in sterling appear likely to remain more influenced by an assessment of general economic prospects in the UK and the risk premium that investors are demanding to hold sterling assets, rather than with the level of Bank Rate.
(Reporting by Sumeet Desai and Matt Falloon; editing by Stephen Nisbet)