David Blanchflower, who sat on the BoE’s Monetary Policy Committee (MPC) for three years until June 2009, warned policymakers could be left with no choice but to take rates into negative territory if a no-deal Brexit sends shockwaves through the UK economy. This could see the country’s largest commercial banks forced to pay the Bank money to hold cash deposits with it, instead boosting incentives for them to lend to households. The BoE had warned in a controversial “doomsday scenario” report, published at the request of MPs on the Treasury Select Committee, that interest rates could rise as high as 5.5 percent if Pound Sterling plummeted and sent inflation soaring.
But in a savage attack against Governor Mark Carney and his executives, Mr Blanchflower raged they were “stupid” to suggest interest rates could rise off the back of a disorderly exit from the European Union.
He told the Press Association: “It was stupid what they said.
“That was a big error. It would kill the British economy stone dead.
“The first thing you would have to start thinking about would be negative rates.”
The economist said the Bank had “very few arrows in the quiver” to boost the economy, with interest rates of 0.75 percent having only being increased after slumping to all-time lows.
Mr Blanchflower’s warning comes after current MPC member Gertjan Vlieghe also criticised the BoE’s analysis, and warned in a speech earlier this month rates were more likely to be cut than increased in the event of a no-deal Brexit.
He said: “In the case of a no-deal scenario I judge that an easing or an extended pause in monetary policy is more likely to be the appropriate policy response than a tightening.”
“The risk of a disruptive outcome, not just uncertainty per se, is one of the key factors that are affecting business investment and financial markets.”
“Reducing uncertainty by making a no-deal scenario happen therefore does not produce net economic gains; it results in actual economic disruption.”
Mr Blanchflower said the Bank could also look to revive its Quantitative Easing programme again if that is what is needed to divert the UK from possible economic disaster.
Quantitative Easing is a monetary policy in which a central bank buys government securities or other securities from the market in order to lower interest rates and increase the money supply.
The former policymaker claimed the Bank could “broaden out what it buys” under this method, perhaps targeting student loans or property.
But he warned monetary policy alone would not be able to repair the crisis that could be triggered by a no-deal Brexit.
Mr Blanchflower said: “The obvious thing would be to cut VAT by five basis points, increase spending like there’s no tomorrow and scrap austerity.”
He also warned interest rate hikes were “dead in the water”, despite the Bank’s most recent inflation report keeping the door open for further rises.
The former policymaker went onto warn the economic outlook looks particularly gloomy, with global economic growth slowing and fears of the US sliding into recession within the next few years.
Mr Blanchflower added: “Whether attributable to Brexit or not, there’s a slowdown coming.”