'Misguided' Bank must act on rates, says Blanchflower

DAVID Blanchflower, the monetary policy committee "dove", warned yesterday that only a dramatic cut in interest rates could stave off the worst effects of a recession and predicted that unemployment could reach two million by Christmas.

Exposing the growing tensions within the MPC, Professor Blanchflower described fears expressed by fellow members that rate cuts would further stimulate inflation as "misguided".

Blanchflower, who has been the lone voice on the MPC calling for a reduction in borrowing costs, was scathing about the Bank of England's forecasts of flat growth, saying they were "wishful thinking".

Speaking ahead of next week's interest-rate-setting meeting, he hinted he would advocate a cut of at least a half a percentage point from the current 5 per cent rate.

Blanchflower revealed that he felt he was carrying the weight of the British people on his shoulders when he sought to convince the other eight members of the MPC of his case.

In an interview with the Reuters news agency, Blanchflower said: "To sit and worry about inflation expectations and what is going to happen to those, rather than worry about the fact that the economy is going to go into a recession seems to be misguided."

He added: "The way to get out of it is to act. Sitting by doing nothing is not going to get us out of this, and hoping that a knight in shining armour will come and lift us out of this is optimistic in the extreme."

Blanchflower warned that two million people could be unemployed by the end of the year, an increase of more than 300,000 on the current 1.67 million figure.

The MPC has voted to hold rates unchanged at 5 per cent for the past four months as inflation – currently at 4.4 per cent and set to peak above 5 per cent – soars.

Blanchflower said much of the debate about the rising cost of living was "very short-sighted". He said Britain could learn from the Federal Reserve and interest rates should be substantially lower than the current 5 per cent.

He added: "The question is what's going to happen in prices … 18 months down the road and the answer is inflation is going to plummet like a rock.

"I've obviously voted on quite a number of occasions now for small cuts but we need to act and we probably need to act in larger amounts than that. We need to get ahead of the game and it appears that we are now behind."