Blanchflower speaks up in favour of rate cuts
October 9, 2008
Earlier this month following the latest Monetary Policy Committee meeting the Bank of England announced that for a fifth month in a row the base rate was to be kept on hold at 5%. Interest rates soared five times between August 2006 and July 2007, each time rising by 0.25%. Between July 2007 and December 2007 the rate remained stuck at 5.75%. However, between December 2007 and April 2008 there were three 0.25% cuts in the base rate bringing it down to 5%, where it has remained since.
In the first few months of this year industry officials were adamant that the base rate would be cut a number of times in the latter part if the year, with some predicting a fall to 4% or below in the base rate. However, over the past few months inflation levels have spiralled out of control soaring to over double the government’s 2% target, and this has put additional strain on the Monetary Policy Committee, providing them with the challenge of weighing up the risks of spiralling inflation with the risks of a slowing economy.
One member of the powerful MPC is David Blanchflower, and as most people that keep up with the news relating to interest rate movement will know he has been ad advocate for rate cuts over recent months. In fact, over the past couple of months there has been a three way split amongst committee members, with the majority voting for the base rate to remain static, one voting for the base rate to be increased, and one – Blanchflower – voting for a cut in the base rate.
Blanchflower is a US based academic, and over recent months has insisted that the Bank of England needs to take the same level of action as the US Federal Reserve has done in terms of slashing the base rate in order to try and stave off recession, which some industry groups have predicted could be only six or nine months away.
In a recent interview Blanchflower stated: “The fears that I have expressed over the last six months have started to come to fruition. 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 actually get ahead of the game and it appears that we are now behind.” He added that the base rate needed to be far lower than its current level of 5%.
He went on to state: “We are going to see much more dramatic drops in output. The way to get out of it is to act, by interest rate cuts and fiscal stimulus and other things to try help people who are hurt through this. 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.”
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