A policymaker has urged the Bank of England (BoE) to use recent jobs growth rather than weak output as a guide to setting interest rates and quantitative easing.

In a speech to students and business leaders at Durham Business School Ben Broadbent, member of the Monetary Policy Committee (MPC), attempted to explain the biggest economic conundrum of recent months; the so-called productivity puzzle that questions how jobs are being created as the country remains mired in recession.

Yesterday's official figures showed the number of Britons on unemployment benefit dropped in August by the largest amount in two years as companies created new jobs. The news had economists and ministers scratching their heads.

Among the reasons Mr Broadbent put forward was that firms are hoarding workers despite suffering sluggish demand in the expectation that they will be ready to exploit the recovery once it arrives. He identified a growing group of "hidden unemployed" who are being retained but could soon face redundancy if the recovery fails to come soon.

"Finding themselves in the position of a cartoon character that has run off the edge of a cliff, but is not yet aware of the fact, firms will at some point have to face reality and trim their under-employed workforce," Mr Broadbent warned.

Another of his explanations was that underlying productivity growth has slowed - meaning that more workers are being used to produce the same level of output. He used the examples of companies in tough times having to employ more sales staff to maintain their customer base.

"We should set policy not just on its ability to affect demand but on its capacity to improve the flow of finance in the economy as well," Mr Broadbent said, highlighting the BoE's Funding for Lending Scheme, which offers banks cheap finance if they lend more to businesses and households, as a lever that can release growth.

His speech was part of a two-day fact finding mission to the region, which included factory visits and a breakfast meeting with 30 bosses, that will be used to help inform future monetary policy.

"You can lock yourself away and look at the numbers, but the numbers are never perfect in any case. One of the ways you test these ideas is to talk to people on the ground and find out what's going on. That has been a big part of what I've been doing. I have seen some fantastic businesses in the North-East, and there is a great deal of innovation and enterprise going on. But I'm aware there are major challenges out there too," he told The Northern Echo.

Mr Broadbent opposed restarting the BoE's quantitative easing programme in July and yesterday he was in no hurry to say if he would back a move to pump £50bn into the economy in November. He stressed that the committee which sets interest rates would uphold its independent status and resist pressures from ministers to implement potentially risky measures aimed at giving the economy a temporary lift.

"If one hears politicians saying life would be better if we had more monetary easing, well the truth is you always hear that from government. We are in a position where we (MPC) can judge it for ourselves, but we are limited. Inflation is higher than we'd expect. I think it's because there has been an independent hit to supply. But it's not possible for monetary policy to solve that on its own. I'm not saying it's ineffective. Without some of the measures that have been out in place we'd have had another Great Depression rather than a banking crisis. But it has its limits, which is why things like the Funding for Lending Scheme can be so important in getting finance to the places where it's needed."