'Iron-fisted' King failed to see coming recession

Bank of England Governor berated for keeping interest rates 'hawkishly' high
Click to follow
The Independent Online

A former member of the Bank of England's Monetary Policy Committee has launched a devastating attack on the Governor of the Bank, Mervyn King, blaming him for keeping interest rates too high for too long. Mr King's "old iron fist" imposed a damaging "group think" on his fellow MPC members, David Blanchflower said.

Writing in the New Statesman, Mr Blanchflower's remarks are unprecedented. "Clever as Mervyn King may be, he missed the crash and the subsequent recession, and hence so did the consensual MPC on which I sat," he writes. "Governor Mervyn King, the old iron fist of the Bank of England, with his hawkish views on rates, dominated the MPC."

Mr Blanchflower, formerly an academic economist in the US, stepped down from the MPC in May, and his comments come as the MPC holds its September meeting. He gained a reputation as an isolated "dove" on the MPC last year, arguing for radical cuts in rates. He has previously been critical of the "inflation nutters" on the MPC.

"In August 2008, the MPC's quarterly Inflation Report did not even contain the word 'recession'. In a news article I called the forecast 'wishful thinking'. Mervyn called me into his office to admonish me for that one."

Echoing concerns sometimes heard in political circles, Mr Blanchflower argued: "The Bank was stocked full of mathematical modellers who had never seen the inside of a commercial bank or a hedge fund – and the models they used failed to pick up on the greatest financial crisis in a century.... In fact, the Bank of England may more suitably be called 'the Bank of Economic Theory'. Unfortunately, the economic theories failed just when we needed them most."

Mr Blanchflower calls for a further easing of policy: "Unless some very strong data is released soon, in my view King cannot, and will not, continue to vote in the minority for very long. My bet is that he will get his way and the MPC will approve further quantitative easing by November at the very latest. He may even manage to get rates down below 0.5 per cent. He obviously now understands how serious is the situation facing the country."

Mr Blanchflower said that Governor "learns fast". "Others on the MPC are more plodding," he added, calling them the "feeble six".

However, encouraging trade figures added to a run of upbeat economic data, as the ratings agency Moody's announced yesterday that Britain's sovereign debt would retain its AAA rating.

The Office for National Statistics said yesterday that export volumes rose by 5 per cent in July, against a rise in imports of about 3.5 per cent. A jump of 19 per cent in car exports was behind much of the improvement. The deficit on trade in goods and services was £2.4bn in July, the same as in June.

Economists pointed to positive trends. Howard Archer, of Global Insight, said: "Exporters are increasingly benefiting from the competitive pound and slowing contraction or even a return to growth in key markets."

Lord Mandelson said of the economy: "I think the signs are that it is [coming out of recession], but there is always a risk of a second recessionary dip. Given that risk, we have to be sure that the measures and interventions that we are undertaking at the moment are not withdrawn prematurely."