Slash interest rates and stop bond sales, ex-policymaker tells Bank of England

The Bank of England should slash interest rates and stop selling government bonds in the wake of the turmoil in the banking sector, a former Threadneedle Street policymaker has said.

David Blanchflower, a member of the Bank’s monetary policy committee during the global financial crisis of 2008, said official borrowing costs should be cut from 4% to 3% at this week’s meeting.

Financial markets expect the Bank either to raise rates to 4.25% or leave them unchanged, but Blanchflower said the committee needed to rethink its approach after the collapse of Silicon Valley Bank in the US and the financial lifeline thrown to Credit Suisse by the Swiss authorities.

Blanchflower, together with fellow economist Richard Murphy, also urged the Bank to reverse quantitative tightening (QT), under which it is gradually selling off the bonds it bought in order to boost the money supply and support the economy between the 2008 financial crisis and the Covid-19 pandemic.

The pair said they strongly supported the Bank’s quantitative easing programme on the basis that it helped to offset the impact of austerity since 2010. Rejecting the idea that quantitative easing (QE) had caused inflation to hit its highest level in four decades, Blanchflower and Murphy said in a submission to the Commons Treasury select committee that bond buying should be resumed at a rate of £50bn a year to prevent the economy sliding into recession. The Bank said last September it intended to dispose of £80bn of the £895bn of bonds it had accumulated over the subsequent 12 months.

Based on the Bank’s forecast of a two-year fall in output and inflation dropping below its target by 2025, Blanchflower and Murphy said there was an “urgent need” for an interest rate cut of one percentage point, with more to follow.

Two members of the committee, Silvana Tenreyro and Swati Dhingra, voted to keep rates on hold at 3.5% when it last met in early February but were outvoted by the other seven members. Financial markets think there is an increased chance of the committee leaving borrowing costs on hold on Thursday, although last week the European Central Bank went ahead with a planned 0.5 point increase in interest rates despite the turmoil at SVB and Credit Suisse.

Blanchflower said: “The Bank of England is showing signs of dangerous groupthink when it comes to QT, believing that it must reverse the previous policy of QE when they have not as yet offered any credible reason for doing so.”

He added: “The Bank of England needs to stand back and reappraise its role on the economy. It could use QE over the next few years to be a powerful force for good for the people of the UK, transforming the mortgage, student loan and business investment markets, in the process using new funds created via QE. We urge them to grab this opportunity instead of heading us towards almost inevitable recession or even depression, so severe could the impact of QT be.”

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Murphy said QE had been “benign and saved the country from many of the worst impacts of the austerity pursued by successive governments since 2010 without creating the current inflation we are suffering.

“The Bank of England is also unable to justify its QT policy but what is clear is that this policy if combined with more austerity in fiscal policy and high interest rate might have disastrous consequences for the UK economy over the next few years, including household debt and consequent banking crises as well as by creating a major threat to the viability of many businesses. The Bank should cancel this policy now.”


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