Bank insider urges UK rate cuts

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Two million people may be out of work by Christmas and house prices will fall by 30% if interest rates are not cut, a Bank of England policymaker has warned.

Professor David Blanchflower, a member of the Bank's Monetary Policy Committee (MPC), told Reuters that big cuts in rates were needed to stave off a slump.

His unemployment forecast would mean 330,000 more people losing their jobs by the end of the year.

He urged the central bank not to be complacent and to act quickly.

Split committee

Professor Blanchflower has been a lone voice at recent MPC meetings in urging a rate cut, while the majority of MPC members have been more concerned about inflation rising above the Bank's 2% target.

However, it is highly unusual for a member of the MPC to speak out in public about interest rate policy.

Professor Charles Goodhart was one of the original appointees when the MPC was established in 1997. He told the BBC that he was not surprised that Professor Blanchflower had spoken out.

"He has tended to do this before, he is very much an outsider and he has been in a minority of one literally every month since he has been on," said Professor Goodhart.

The Bank is facing tough choices over interest rates

"I would expect that those involved in the financial world would not take what he says as any indication of what is likely to happen in future."

At its latest meeting earlier this month, the Bank's MPC voted to keep rates unchanged, but the vote was split three ways, with one member (Professor Blanchflower) urging a cut, while another (Tim Beesley) wanted a rate rise.

Professor Blanchflower - a US-based academic - says that the Bank of England should learn from the example of the US Federal Reserve, which has cut interest rates to 2% to stem off a looming recession.

And he urged the Bank to make a rate cut bigger than a quarter percentage point in order to avoid a slump.

Recession fears

Recently-revised government figures show that the UK economy ground to a halt in the second quarter of 2008, showing zero growth compared with the previous three months.

On Thursday, the Nationwide building society said that UK house prices were now falling at an annual rate of more than 10% a year.

Latest official figures showed unemployment rose in the three months to June by 60,000 to 1.67 million.

Many analysts expect the Bank of England to eventually begin cutting interest rates again, but they are not sure how soon.

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

Markets are expecting a cut in interest rates by early next year. This expectation has also weakened the value of the pound because lower rates make it less attractive to hold sterling.

Misguided

Professor Blanchflower said that his colleagues on the MPC who were worried about entrenching inflationary expectations were "misguided" and "short-sighted," as inflation was likely to "plummet" as the economic crisis worsened.

"What we have now is a turning point," he said.

"We have a global financial crisis, an oil shock coming, and people really have very little experience of what is really going on."

In its latest inflation report, Bank of England governor Mervyn King said that the UK economy faced "challenging times."

The Bank's central forecast, however, suggests that UK will just escape a recession, with growth of about 1% next year.