Finance chiefs should slash interest rates to never-before-seen levels and ministers should end austerity to boost the economy in the event of a no-deal Brexit, a former Bank of England policymaker has said.
David “Danny” Blanchflower – who sat on the bank’s influential Monetary Policy Committee (MPC) from June 2006 to June 2009 and “predicted” the scale of the 2008 financial crisis – said the institution’s decision-makers may be left with little option but to take rates below zero if a no-deal Brexit sends shockwaves through the economy.
In a savage critique of the bank’s recent predictions over Brexit, he said governor Mark Carney and his team were “stupid” to indicate that rates could rise in the event of a disorderly exit from the EU.
Taking interest rates into negative territory from their current level of 0.75% would be unprecedented.
The move would, in theory, see people encouraged to spend rather than save, as cash hoards would end up being worth less than the amounts originally deposited.
But Blanchflower warned that monetary policy alone would not be able to fix the crisis that would be sparked by a cliff-edge Brexit, with government and fiscal measures also vital, he said.
“The obvious thing would be to cut VAT by five basis points, increase spending like there’s no tomorrow and scrap austerity,” he said.
A 2.5% VAT reduction was one of the measures introduced by the then Labour government during the financial crisis in 2008.
The British-born economist, who moved to the US in 1989, said the bank, which is in charge of setting interest rates, had “very few arrows in the quiver” to boost the economy, with rates at just 0.75% having only recently been lifted off all-time lows.
He told the Press Association news agency this would mean negative rates “have to be on the table, because you’d be trying to encourage people to spend and not save”.
His comments come after current MPC member Gertjan Vlieghe also took aim at the bank’s Brexit analysis, saying in a speech earlier this month that rates were more likely to be cut than hiked in a no-deal scenario.
The warning over negative rates confirms that the UK could be heading into uncharted economic territory if a deal is not secured.
While the financial crisis was unprecedented, the bank at least had plenty of room to cut rates to help contain the fallout.
But Blanchflower – who was a lone voice on the MPC calling for rates to be cut in 2008 when others appeared not to see the scale of the recession on the horizon – said the bank could also look to rekindle its quantitative easing programme - the printing of money - if needed.
He said it could “broaden out what it buys” under QE, perhaps looking to buy student loans or property.
While the bank’s last inflation report kept open the prospect of further rate rises, Blanchflower said hikes were “dead in the water”.
With the global economy slowing and growing whispers of a US recession around the corner, he said Brexit was coming at a bad time.
“Whether attributable to Brexit or not, there’s a slowdown coming,” he warned.