DAVID “DANNY” BLANCHFLOWER, the member of the Bank of England’s monetary policy committee (MPC) who consistently warned of the danger of recession, believes UK interest rates should “obviously” head down to America’s near-zero level.

Blanchflower, in an interview with The Sunday Times, also said that unemployment, now standing at 1.92m, would rise to 3m in a year’s time and could go higher.

The economy, he said, would continue to shrink until at least the third quarter of this year, after which it was impossible to forecast with precision.

However, the man who has been known for his gloomy views on the economy was also upbeat about Britain’s prospects over the medium term and said the markets had been wrong to think that Britain was doing worse in this recession than the eurozone.

On interest rates, Blanchflower said UK rates had to head down to the 0% to 0.25% level set by the Federal Reserve in America. He denied that rate cuts had lost their impact but welcomed the fact that further tools, including “quantitative easing” – artificially boosting the money supply – would soon be at the Bank’s disposal.

Though no decisions had yet been taken on this, he said he expected MPC members to have the say on when, and by how much, quantitative easing should occur.

His big worry in the recession, he said, was the rise in unemployment among young people, already occurring at a faster rate than the workforce as a whole.

“We’re at 1.92m now,” he said. “It would be hard to think we would not get to 3m, perhaps in a year’s time. If you take the experience of previous recessions, 3m might be optimistic.

“Unemployment when people are young really matters. There are 600,000 18-24 year olds unemployed now, 14.5% already. That’s my big concern,” he said.

Blanchflower is also confident, though, that the actions now being taken will bring economic recovery. The British authorities were quicker to spot the recession than their European counterparts, he said, and people were “too bearish, too pessimistic” about Britain’s prospects vis-a-vis those of the eurozone.

“Economies turn round, economies recover, and this one will,” he said. Part of the mechanism for the recovery would be that “we are throwing everything at it”, he claimed, but also that real incomes would receive a significant boost from sharply falling inflation.

While pushing for lower rates now, he said, “you have to be prepared, once the economy recovers, to raise them again”. He also accepts that the MPC kept rates too low during the good times.

“It certainly appears that the housing market was a bubble and that rates should have been raised earlier than we did,” he said.

According to a survey of analysts by Ideaglobal.com, the financial research company, analysts expect the Bank of England to cut interest rates from 1.5% to 1% when the MPC meets on February 4-5.

In America, the Federal Reserve will meet this week and is likely to give more details of its strategy of “credit easing” – boosting the flow of credit by buying bonds and other debt from the private sector.

The UK Treasury will also give further details of its plan to allow the Bank to engage in a similar exercise. Alistair Darling, the chancellor, will set out the terms in a letter to Mervyn King, the Bank’s governor.

After figures on Friday showing Britain’s gross domestic product dropped by 1.5% in the fourth quarter of 2008, attention will switch to America’s fourth-quarter GDP data, which are set to show an annualised fall of about 5%, roughly equivalent to a 1.2% fall if calculated the British way.

Explore Economics

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