"Monetary policy has not been sufficiently forward looking" and interest rates "need to come down significantly – and quickly", according to a member of the Bank of England's Monetary Policy Committee.
Amid mounting evidence that the UK economy is in a recession, David Blanchflower, known for advocating rate cuts while his MPC colleagues have remained cautious, said in a speech at Keynes College at the University of Kent yesterday that "if rates are not cut aggressively we do face the prospect of a relatively deep and long-lasting recession."
According to the minutes from the MPC's monthly meeting in September to decide on the Bank of England's base rate, "most members judged that maintaining Bank Rate at 5 per cent this month was necessary if inflation was to be brought back to the target in the medium term." It was even said that "a case could be made for an increase in Bank rate".
Typically, Mr Blanchflower was not among those members who voted to maintain the bank rate, and was, instead, "alone in voting for an immediate cut" of 50 basis points. He finally got his wish in October, when the MPC voted unanimously in favour of cutting rates from five per cent to 4.5 per cent.
He agrees with the Governor of the Bank of England Mervyn King who said last week that it was "likely that the UK economy is entering a recession" and would like to see more rate cuts before the end of the year.
Mr Blanchflower believes that monetary policy should not have pandered to inflation at the detriment of the wider economy. Compared to the other problems raging through the economy, "it seems to me that the risks from heightened inflation expectations should have been treated as benign" he said.
After months of the MPC being restrained on cutting rates as inflation smashed through its target of two per cent, the Chancellor Alistair Darling has now said that there is some leeway on inflation and that discretion can be taken in meeting inflation targets while the MPC supports the needs of the wider economy.
In the third quarter the UK economy shrunk by 0.5 per cent, it has now been revealed, the biggest contraction since the early 1990s, and this is not expected to improve in the near future as consumer spending is forced down by falling house prices and increasing levels of negative equity.
The impact of the economic climate on the economy "has been predictable", said Mr Blanchflower. The question now is, "how long will it last and how deep will it cut?"
After Nationwide's house price index revealed today that values have fallen for the 12th month in a row, Fionnuala Earley, chief economist at Nationwide, predicts that "The half percentage point reduction in October will not be the last rate cut of 2008" as the Bank of England
attempts to stave off a "deep and prolonged" recession, and could be cut by at least another 50 basis points by the end of the year.
Governments around the world are being forced to cut interest rates drastically in attempts to thaw interbank lending. China has cut its main interest rate unexpectedly to 6.66 per cent, while the US Federal Reserve has tried to rein in the dollar for the second time in three weeks by slashing rates to just one per cent.
Despite the current conditions in the financial system, Mr Blanchflower remains optimistic about the future of the UK economy. "Modern economies have proved themselves resilient to downward shocks and in the long run there is much about which we should be optimistic." he said. "Britain’s economy will, eventually, recover."
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