In a decidedly "doveish" intervention, the Deputy Governor of the Bank of England, Sir John Gieve, said yesterday that the "reckoning" for the real economy of the credit crunch will be "more severe and destabilising than anyone anticipated".
Sir John, who has responsibility for overseeing financial stability, commented that "while we must remain vigilant for any signs of inflation drifting upwards, the news on that front is encouraging. On the other side, the risk we must be careful not to underestimate is the deflationary consequences of the credit crisis. At the moment we are focused on the risk that the slowdown in the real economy will be amplified through a contraction in banks' balance sheets".
The Deputy Governor also suggested, albeit with hindsight, that the Bank had kept rates too low, stoking the credit boom and, thus, creating the conditions for the current bust: "Across the world as a whole there was a case for somewhat tighter monetary policy to prevent the demand for resources outstripping supply" – though "it is hard to believe that a somewhat tighter monetary policy would have been guaranteed to head off the credit boom and subsequent crunch altogether".
One of a series of speeches due from members of the Bank's Monetary Policy Committee this week, Sir John's words heightened speculation that he at least will take the next opportunity to follow the vocal urgings of his MPC colleague David Blanchflower and vote for a cut in interest rates when the MPC next meets, on 8-9 October. The minutes of the September meeting suggested that the Committee is tending towards rate cuts sooner rather than later.
Howard Archer, UK economist at Global Insight, said: "Gieve's comments reinforce our belief that the Bank will cut rates from 5 per cent to 4.75 per cent in November."Reuse content