MPC dove says house prices may drop by a third in two years

The Bank of England's leading "dove" has warned that house prices could fall by as much as a third in the next two years and called for swift cuts in interest rates to stave off a crash.

David Blanchflower issued the warning in a speech at the Royal Society in Edinburgh last night. He said: "In my view, a correction of approximately one-third in house prices does not seem implausible in the UK over a period of two to three years if house price-to-earnings ratios are to be restored to more sustainable levels."

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Mr Blanchflower said he was not suggesting such a fall would occur but added: "It may. Cutting interest rates now may help to prevent such a dramatic fall."

Earlier in his speech, he had said: "Monetary policy, in my view, still remains restrictive currently, and we need to take action to loosen policy sooner rather than later. I do feel that the slower rates fall, the further they will eventually have to go down to boost the economy."

Mr Blanchflower warned that the downbeat news from the housing market had spread to the high street, noting the recent British Retail Consortium figures showing a 1.6 per cent fall in like-for-like sales in March compared with last year.

He has the unwanted reputation of being the interest rate dove-in-chief on the Bank's Monetary Policy Committee and argued for a 0.5 per cent cut at its meeting earlier this month. The Bank ultimately cut rates by just 0.25 per cent.

But Mr Blanchflower argued that this did not mean he was being complacent about inflation. He said: "I have been inaccurately referred to as a dove. I simply have not seen evidence of domestically driven medium-term inflationary pressures, particularly in the labour market." He went on to warn that the UK faced a real risk of recession.

Mr Blanchflower reiterated his recent warning that he was "concerned about the possibility of seeing something horrible" arising in the economy. "The risks to inflation on the downside are of more concern to me than those to the upside," he said.

Mr Blanchflower also predicted that 5 per cent of the City's workforce could lose their jobs, amounting to 40,000 people, and said he believed that the labour market generally had "turned".