Bank of England governor Mark Carney warned the economy faced renewed dangers from excessive borrowing as he outlined a shake-up that consolidates the Bank's broader responsibilities including financial stability.
Mr Carney admitted low interest rates meant the UK was facing "similar risks" to those behind the crisis that emerged in 2008 - as households and businesses feel encouraged to borrow to excess.
But he set out the prospect of a future when the Bank's beefed-up role may mean there is no longer any need for sharp interest rate rises to control overheating markets.
Mr Carney indicated a move away from a previous period when its only goal had been achieving the inflation target of 2%, saying this had become a "dangerous distraction".
The governor made the remarks as he unveiled details of a six-month strategic review which will result in sweeping changes in the Bank's structure. It came hours after the announcement of three new high-ranking appointments at Threadneedle Street.
Mr Carney's reforms consolidate new responsibilities for regulation and stability given to the Bank in the wake of the financial crisis in addition to its role in setting interest rates and keeping a lid on inflation.
But he said that new "macroprudential" powers held by the Bank - which include making sure banks have adequate levels of capital and tools to cool down an overheating housing market - could help.
They would reduce the need for interest rate policy to be "diverted" towards dampening excessive borrowing.
"That in turn may reduce the need for sharp or persistent moves in interest rates, which themselves might threaten financial stability," he said.
"Although monetary policy has an important role to play in mitigating financial stability risks, it does so only as a last line of defence."
He signalled frustration over a previous concentration purely on the inflation target, saying: "With time, a healthy focus became a dangerous distraction."
Mr Carney said the widening of the Bank's responsibilities was a welcome return to its "broad role" of the past - citing the "judicious exercise of the governor's eyebrows" historically to manage and resolve financial crises.
But he added: "The age of informal responsibilities, nods winks, secrecy and instinct is long past."
Instead, a series of new positions and directorates are to be set up at Threadneedle Street would formalise the position
Policy makers have said that any rise in interest rates from their current historic low of 0.5% will be limited and gradual.
But Mr Carney said they were "fully aware that an environment of relatively low and predictable interest rates could encourage excessive risk-taking in financial markets and by households".
He said the previous reduced view of the Bank's functions had been "fatally flawed", failing to recognise that financial stability was as important as price stability, as he unveiled his new "One Bank" plan to be rolled out over three years.
It will undertake 15 initiatives, with a key aim of maximising the effectiveness of the Bank's work by breaking down barriers between separate areas of its work.
Mr Carney said the plan also "sweeps away a proliferation of internal committees that held up decision making".
The Bank will adopt a new mission statement: "Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability."
It said the motto embodied the public service mission of the institution that had been in place since its original 1694 charter.
"In short, we are creating a central bank for the 21st century that combines the finest aspects of our history and traditions with the best of the modern and new," Mr Carney said.
The reforms include the creation of a new independent evaluation unit to support the Bank's oversight committee - beefing up its self-policing in the wake of damaging allegations that some officials knew about attempts to rig foreign exchange rates.
In a shift towards greater transparency, Mr Carney also said the Bank would publish the results of regular bank stress tests, as well as more of the research and analysis underlying policy choices.
Earlier today, the Bank announced the appointment of Dr Nemat Shafik to take on the newly-created role of deputy governor responsible for markets and banking.
Dr "Minouche" Shafik will join on August 1 with a priority to conduct a root-and-branch review of how the Bank monitors markets following the forex allegations.
Meanwhile, Ben Broadbent, already a member of the nine-strong rate-setting Monetary Policy Committee, was named as successor to Charlie Bean, the outgoing deputy governor for monetary policy.
Anthony Habgood, chairman of Costa Coffee and Premier Inn group Whitbread, will become chairman of the court of the Bank of England as part of a raft of appointments.
Mr Carney did not respond directly to a question about whether the recent decision by the Government to extend its Help to Buy policy to support the housing market was sensible - given his warnings over excess borrowing.
But he stressed that the Bank stood ready to build on measures it has already taken to try to take some of the heat out of the sector.
In November, it scrapped the household mortgage element of the flagship Funding for Lending initiative that encourages borrowing, amid fears of a property bubble.
The Bank's Financial Policy Committee also announced a new power to be able to vary the affordability criteria that borrowers must meet to ensure they can afford to service mortgages if interest rates rise, and has set out further powers it could use.
Mr Carney said today: "We have taken measures in the past if necessary. We have outlined the other range of tools we have as the FPC and we won't have any hesitation to take the necessary steps - but only at the right time and only in the right proportion."
He has previously said the Bank could ask lenders to restrict borrowing terms or even force them to hold more cash on their balance sheets to dampen down an overheated property market.