Monetary committee setting interest rates was 'kept in dark', former member claims
Former member of the Monetary Policy Committee, David Blanchflower. Photograph: David Moir/Reuters Members of the Bank of England's monetary policy committee were not informed of the Bank's secret £62bn loan to HBOS or RBS last year, which would have been a key factor in their setting of interest rates, the former MPC member David Blanchflower reveals today.
The news will embarrass the Bank of England governor, Mervyn King, who released details of the secret loans last week. The loans were made in October and November last year, as the banking system teetered on the brink after the collapse of Lehman Brothers.
Blanchflower writes in today's New Statesman: "Despite being an external member of the MPC at that time, nobody told me about these loans or how bad things were in the financial markets. The announcement by the governor in his Treasury select committee appearance last week was the first time I had ever heard of these loans. We were also kept in the dark about what was happening with Northern Rock. Nobody briefed me, even ex-post. The extent to which the external members of the MPC were excluded from basic information on the crisis is only now coming out."
He says he understands why such loans were kept from the public and financial markets because of the panic it might have caused, but not key policy makers such as the MPC. "Surely such information was relevant to our interest rate setting decisions? If we had been told what was going on we may have started quantitative easing sooner and cut rates faster," he adds. "There is no point in having an MPC unless members, and not just some, are given vital information."
Blanchflower, through 2008, led calls for cuts in interest rates, sensing a big recession was coming. But he was consistently out-voted at the MPC's monthly meetings by his colleages, who were more worried about wage inflation taking off, which it never did.
The committee only slashed rates after Lehman Brothers collapsed, taking them rapidly down to a record low of 0.5% and then embarking in March on £200bn of quantitative easing.
Blanchflower also writes that the financial crisis is "far from over" and calls on Alistair Darling to keep the stimulus going in next week's pre-budget report.
"Heading into the PBR the chancellor must not allow himself to be deflected from the course of action he has successfully followed so far. Monetary and fiscal stimuli have successfully prevented us from falling off a cliff. But there are likely to be storms ahead. Now is not the time to start paying off the debt, cutting public expenditure or raising taxes. And I would cancel the plans for VAT to go back to 17.5% in the new year."
By contrast, the Bank's chief economist, Spencer Dale, used a speech yesterday to argue that the economy was moving into a period of "renewed expansion" and warned of a danger of a new bubble in frenzied financial markets. Dale voted against the £25bn extension of QE that the MPC approved last month.
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