In an unprecedented move, a member of the Bank of England's Monetary Policy Committee (MPC) has criticised the Bank for complacency and "wishful thinking", predicting that two million people will be out of work by Christmas and that house prices will fall by more than 30 per cent.
David Blanchflower, who has consistently warned of the perils facing the economy, attacked the Bank's current thinking. "To sit and worry about inflation expectations, rather than worry about the fact that the economy is going to go into a recession, seems to be misguided," he said.
"People have to start to respond to the fact that we are in a recession and the danger is we'll be in a very serious and long-lasting recession unless we do something. This is a call to action." He demanded a substantial cut in interest rates and said the Bank's latest forecast of "broadly flat" growth "certainly has a great deal of wishful thinking attached to it".
Mr Blanchflower's unemployment forecast would mean 330,000 more people losing their jobs by the end of the year – banks and construction firms being the first to lay staff off, he believes. The MPC – charged by the Government with the task of setting interest rates – meets next week to fix rates; few expect an immediate cut, despite the warning.
Mr Blanchflower is an external member of the MPC, which is chaired by the Governor of the Bank of England, Mervyn King.
Intellectual tensions between the MPC's membership have become more apparent in recent months, with the emergence of a three-way split revealed in the MPC's minutes. One "hawk", Tim Besley, also an external member, has recently been voting for a quarter-percentage-point increase in rates, with Mr Blanchflower, the so-called "arch-dove", habitually opting for a cut of the same size, or more.
A majority in the MPC has voted for no change since May, torn between fear of accelerating inflation and a slump that would see price rises way below the official target of 2 per cent a year. The Bank's rate stands at 5 per cent, having been cut by 0.25 per cent in April.
The Bank of England maintains that all MPC members are supposed to put forward an independently formed view eloquently and vigorously, as equals.
However, Mr Blanchflower's passionate rebelliousness and criticism of fellow MPC members may not be welcomed in the Governor's parlour. "I feel a weight on my shoulders," Mr Blanchflower told Reuters. "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 of what is appropriate.
"People need to understand that sometimes you will have to focus on the timing of issues. I think people have become complacent and they have not understood what would happen if an economy starts to slow fast, if firms start to close. 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 [and] people with little experience of what is really going on."
Sterling fell on reports of Mr Blanchflower's comments, as traders marked up the chances of the Bank reducing rates sooner rather than later. A quarter-point in November seems to be the most likely outcome, later than Mr Blanchflower urges but presentationally easier for the Bank, given that the "spike" in inflation at 5 per cent or more should by then be over.
On the day that the Nationwide Building Society reported that property prices had fallen by more than 10 per cent a year for the first time since the crash of the early 1990s, Mr Blanchflower warned that worse was to come. "I thought 30 per cent was the potential fall we could see," he said. "I think that might even now be optimistic. I think 30 per cent does look a fairly optimistic number and markets are now coming around to that view." Such a house-price fall would plunge around two million owner-occupiers into negative equity.
Join our new commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies