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| Forex News : Need big rate cuts to avoid deep recession-BoE's Blanchflower |
By: inter01  9 November 2008 view: 57
Need big rate cuts to avoid deep recession-BoE's Blanchflower
By David Milliken
CANTERBURY, England, Oct 29 (Reuters) - The credit crisis could turn out to be more far-reaching even than the 1929 crash and big interest rate cuts are needed to avoid a deep recession, Bank of England policymaker David Blanchflower said on Wednesday.
Blanchflower, who has consistently been the most dovish member of the Bank's nine-member monetary policy committee, criticised his fellow policymakers for not being more forward looking and said inflationary pressures were now "clearly dissipating".
"My view remains that interest rates do need to come down significantly -- and quickly," Blanchflower told an academic audicence in Canterbury. "If rates are not cut aggressively we do face the prospect of a relatively deep and long-lasting recession."
Blanchflower said the energy price shock, which took oil prices to a record high of $147 a barrel in July, would be less damaging than that faced in the 1970s. In contrast, the international financial problems may turn out to be more severe.
"It is even possible that this event may turn out to be more significant than the 1929 crash which primarily involved bank failures in the United States," he said.
"The current difficulties in financial markets are more global in nature and more comparable to what happened in the First World War."
Interest rate cuts were needed, he said, not to protect the banks but to protect the public from the banks, many of which had made unwise lending decisions. The Bank of England's key interest rate is at 4.5 percent.
GOVT ACTION WELCOME
Blanchflower welcomed recent government efforts to re-capitalise major banks but said lending conditions would take some time to recover.
"Any improvement is likely to be passed on to households and the corporate sector slowly," he said. "Rather, credit availability is more likely to be curtailed further in the near future."
He said the impact of constrained credit conditions had yet to fully feed through to the broader economy and a further retrenchment of consumer and investment spending was to be expected.
Against such a backdrop, Blanchflower said worries about inflation were misplaced. There was no evidence workers were bargaining for wages to keep up with the cost of living and unemployment was set to rise.
More than two million people were likely to be out of work by Christmas, he said.
Britain's economy contracted in the third quarter for the first time in 16 years and Blanchflower said he expected a further contraction in the fourth quarter and through 2009.
He implied his colleagues on the monetary policy committee should have realised the gravity of the situation earlier.
"With hindsight, monetary policy has not been sufficiently forward looking," he said. "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." (writing by Christina Fincher, editing by Swaha Pattanaik)
More news on this topic:
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