Blanchflower: rates must fall 'significantly and quickly'

Thursday, 30 October 2008 2:46 PM

The financial crisis could hit the global economy harder than the Great Depression, warned one of the Bank of England's interest rate setters last night.

David Blanchflower - who has consistently been calling for interest rate cuts for the last 13 months - said: "It is hard to describe in sufficient detail the scale of recent disruptions.

"Many financial markets remain dysfunctional and it is unclear when conditions may improve."

The monetary policy committee (MPC) member added: "The UK is obviously especially exposed to the financial turmoil because of our dependency on the financial sector, and because the run-up in house prices and debt levels was even greater here than in the United States.

"My view remains that interest rates do need to come down significantly - and quickly."

Mr Blanchflower also warned of further strife from financial crisis - with the full effect of the financial crunch still to hit the economy - despite recent GDP figures already showing a 0.5 per cent contraction in the economy.

"I believe the impact of constrained credit conditions has yet to fully feed through to the broader real economy," he said.

"It is most likely the current 'energy price shock' will be less damaging than those faced in the 1970s," Mr Blanchflower said.

"It is even possible that this event may turn out to be more significant than the 1929 crash."

However, he also warned about excess doom-mongering.

"It is a mistake to be overly gloomy or to focus excessively on the near term," the professor said.

"The herd behaviour that took us up can also take us down, and that would be unfortunate. Modern economies have proved themselves resilient to downward shocks and in the long run there is much about which we should be optimistic.

"Britain's economy will, eventually, recover."

Mr Blanchflower also highlighted the Bank of England does not have to focus on inflation - its primary target - and hit out at the other MPC members fro not being forward thinking enough.

The target is to keep the consumer prices index at two per cent. Currently it is at 5.2 per cent, which is why interest rates have been held high over the last year.

Mr Blanchflower said: "The remit of the Bank of England is thus sufficiently flexible that it allows us not only to focus on the inflation target, but also to support the government's wider objectives of economic stability."

He added: "Monetary policy has not been sufficiently forward looking. Changes in monetary policy only affect the real economy with a substantial lag.

"Hence, monetary policy makers must take a medium-term view concerning the forces hitting the UK economy and set policy accordingly. It is not sufficient to consider the data month by month until it emerges that the UK is in recession."

Chancellor Alistair Darling today has also hinted the MPC should focus on cutting rates for the sake of the economy over focusing too greatly on inflation.

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