Friday, August 29, 2008
That Blanchflower interview
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Land Registry figures are out, showing prices dropped 0.6% in July and were 2% down on a year earlier, rather different from the Nationwide's 10.5% fall. Details here.

Of rather more interest was David "Danny" Blanchflower's Reuters' interview, which I reproduce in full here.

Two million Britons may be out of work by Christmas and big cuts in interest rates are needed now to stop the economy heading into a deep and prolonged slump, Bank of England policymaker David Blanchflower told Reuters.

In an interview on Thursday, Blanchflower said the Bank could no longer be complacent because the economy was already shrinking and a rate cut of more than 25 basis points was probably needed.

He said his own forecast earlier this year that house prices could fall by 30 percent was looking optimistic and that the jobless total could spike higher as construction companies and banks lay off workers.

His unemployment forecast would mean some 330,000 people losing their jobs in the second half of the year.

"The fears that I have expressed over the last six months have started to come to fruition," he said, speaking ahead of next week's Monetary Policy Committee meeting.

"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."

Blanchflower, a U.S.-based academic who has often been a lone voice on the MPC in calling for lower rates for 10 straight months, said Britain could learn from the action of the Federal Reserve and interest rates should be substantially lower than the current 5 percent.

The pound fell by about a third of a cent against the dollar after his comments reinforced market expectations that borrowing costs could fall before the end of the year and that sentiment on the MPC may be edging towards Blanchflower's view.

"There are clearly signs that they are moving in that direction fairly slowly," said Jonathan Loynes, an economist at Capital Economics.

"Yes, rates probably should have started to come down by now but I can understand the uncertainty around that and why, as a central bank, they would want to err on the side of caution."

WISHFUL THINKING

Blanchflower described the Bank's forecast earlier this month of the economy standing still over the next year as "wishful thinking" and said things could be easily a lot worse.

"We are going to see much more dramatic drops in output," Blanchflower said. "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."

And he said that an expected boost to exports from a weaker pound was unlikely to prove the "great rescuer" of the economy.

Other BoE policymakers, however, are more concerned about inflation, which is running at more than double the central bank's 2 percent target and expected to go higher still.

One MPC member, Tim Besley, even voted for higher interest rates earlier this month. The chief concern for the hawks is that higher inflation numbers now will feed through into wages as expectations of higher inflation become entrenched.

Blanchflower disagreed with that -- he thinks wage growth will weaken as unemployment rises because workers shy away from demanding higher more pay as they worry about losing their jobs.

The latest official figures show the number of people out of work increased by 60,000 in the three months to June on the internationally comparable International Labour Organisation measure to reach 1.67 million.

"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 said.

"What we have now is a turning point in many ways -- certainly you might think of it as a paradigm shift. We have a global financial crisis, an oil shock coming, people with little experience of what is really going on."

Blanchflower said much of the debate about inflation was "very short-sighted".

"The question is what's going to happen in prices in 18 months down the road and the answer is inflation is going to plummet like a rock," Blanchflower said.

The arch-dove said he felt as if he was carrying the weight of the British people on his shoulders.

"I feel that things I have been fearful about have come to pass and I have actually been pretty accurate in what's coming and I have failed to convince the others (MPC members) of what is appropriate."