Austerity measures proposed by the U.K.’s new coalition government run the risk of reviving the recession unless Bank of England Governor Mervyn King loosens monetary policy, former BOE member David Blanchflower said.
“The dance will be, we will be cutting but you need to be loosening, and will you dance to our tune,” Blanchflower said in a Bloomberg Radio interview today with Tom Keene. “I suspect Mervyn King will be Mervyn King and be independent. The worry will be that they generate a double dip.”
The pound declined for a third day after the Bank of England said May 12 that there are “somewhat greater downside risks” to its forecast that growth will reach a 3.5 percent annual pace by 2012, while inflation is likely to be below its 2 percent target. The bank, which has kept the benchmark interest rate at a record low for the past year, hasn’t ruled out further asset purchases under a policy known as quantitative easing, King told reporters May 12. Prime Minister David Cameron’s government plans measures within 50 days to cut spending by 6 billion pounds ($9 billion).
“It looks from the forecast that they produced this week they should have been doing lots more QE and they’re not,” Blanchflower said. “If you cut you need the governor, or the Bank of England to be loosening monetary policy.”
Blanchflower predicted that that government formed by Cameron’s Conservative Party and the Liberal Democrats will collapse by year-end as differences over policies become too great.
The decline in the pound since the cuts were agreed to shows investors are concerned whether growth will slow, Blanchflower said. “They had about a 12-hour bounce in the exchange rate and then the pound started to tumble against the dollar ever since these things were announced,” he said.
King compromised his independence by supporting the new government’s austerity package at a press conference to launch the Monetary Policy Committee’s inflation report, Blanchflower wrote in a column published today by Bloomberg News.
“This clearly isn’t the MPC’s view, but simply his own, as there would have been no time to consult his colleagues on the committee,” Blanchflower wrote. “As a former MPC member, I recall King’s strict dictum that we shouldn’t speak on fiscal matters, which weren’t part of our purview.”
The U.K. budget deficit was a record 166.5 billion pounds last year and was forecast to be 163 billion pounds, or 11.1 percent of gross domestic product, for the current fiscal year, according to the U.K. Treasury’s budget.
The pound dropped 0.6 percent to $1.4521 at 11:26 a.m. in New York, from $1.4613 yesterday. It reached $1.5045 on May 12 after Conservatives and Liberal Democrats agreed to form a government. Sterling appreciated 0.6 percent to 85.23 pence per euro, from 85.78.