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The Bank of England failed to respond to the warning signs of a looming recession and was wrong to delay cutting interest rates until it was too late to stop growth contracting and unemployment rising sharply, a member of the Bank's monetary policy committee (MPC) said last night.
Speaking as the US Federal Reserve cut interest rates to just 1% in an attempt to halt a slump in activity, David Blanchflower launched an outspoken attack on his eight MPC colleagues.
He said Threadneedle Street had been too optimistic about the ability of the economy to survive the global financial crisis with only a modest downturn in activity and that Britain would now endure 18 months of falling output as it felt the full impact of the credit crunch.
The Bank is expected to follow the Fed's lead with a cut of at least half a percentage point in UK rates next week, although some analysts are calling for a one point cut after news that the economy shrank by 0.5% in the third quarter of this year.
Blanchflower was a lone voice on the MPC calling for cuts in interest rates this summer and speaking in Canterbury last night he criticised fellow MPC members for ignoring his warnings.
"With hindsight, monetary policy has not been sufficiently forward looking. Changes in monetary policy only affect the real economy with a substantial lag. It is not sufficient to consider the data month by month until it emerges that the UK is in recession. I believe the trend has been apparent for some time. The synchronised downturn in so many surveys should have led us to realise sooner that the UK economy was entering a recession."
"If rates are not cut aggressively [when the MPC meets next week], " he said, "we do face the prospect of a relatively deep and long-lasting recession."
His intervention came as Gordon Brown faced the most severe criticism yet from the Conservatives over his handling of the financial crisis, with the Tory leader, David Cameron, challenging the prime minister to admit that his fiscal rules were dead, and that he intended to embark on a "spending splurge." In a stormy exchange in the commons, Brown accused the Tories of failing to deliver a consistent message on how to deal with the downturn. Referring to the decision to relax the government's fiscal rules, the chancellor, Alistair Darling, later said it would be "perverse" to apply them rigidly during the downturn.
Brown sought to reduce repossessions by demanding that finance companies behind store and credit cards make it more difficult to seize homes to pay debts.
In his speech, Blanchflower said tighter credit conditions imposed by banks had yet to be fully felt. Policymakers faced an "unusually severe" international financial problem, possibly more significant than the 1929 crash, which principally involved bank failures in the US. "The current difficulties in financial markets are more comparable to what happened in world war one, when stock exchanges in several countries closed for extended periods."
The MPC had been reluctant to cut rates during the summer as inflation rose to a 16-year-high of 5.2% in September.
Blanchflower said the MPC had over-reacted to the threat that higher imported oil and food prices would repeat the 1970s inflationary spiral. Workers' bargaining power was weaker now, with little chance that they could push up wages in response to rising prices.
"UK In its last health check on the economy, released in August, the Bank said it expected output to be broadly flat over the coming year, with employment falling a little. Output growth was expected to recover in 2009 as energy prices fell, the credit crunch eased and a weaker pound helped exports.
"This was an optimistic view," Blanchflower said. "Clearly output is now beginning to contract, but I think this likelihood was apparent in August."
He added that at last month's MPC meeting some members had argued for higher borrowing costs. "I was alone in voting for an immediate cut in bank rate by half a percentage point.
"I am concerned about the detrimental effect of recent events in financial markets on the UK economy," he said, adding that the 0.5% drop in GDP had occurred mainly before this autumn's market meltdown.
- Bank of England
- Economic policy
- Recession
- Market turmoil
- Gordon Brown
- Credit crunch
- Interest rates
- Banking sector
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