In the aftermath of the Bank of England’s largest monthly decrease in interest rates since November 2001, Dartmouth economics professor and member of the Bank’s Monetary Policy Committee David Blanchflower said he is “the one who got it right.”
Blanchflower, the only Dartmouth professor ever to be appointed to the Monetary Policy Committee, called for a decisive decrease in interest rates at least a year before the Committee’s Oct. 8 unanimous decision to lower rates 0.5 percent.
Originally, Blanchflower’s June 2006 appointment as an external member of the Monetary Policy Committee, the equivalent to the board of the U.S. Federal Reserve, sparked controversy because he is not a resident of the United Kingdom. A professor of economics at Dartmouth since 1993, Blanchflower agreed to accept the position only if allowed to split his time between Hanover and London. Blanchflower, who holds a dual British-American citizenship, said he was sometimes mistakenly referred to as an American, but prefers to be called British.
Blanchflower’s unconventional voting record drew attention from the British public and the members of the Committee. Since October 2007, Blanchflower has voted to reduce the interest rates at every monthly meeting and voted in the minority nine out of thirteen times. This caused his critics to call him a “maverick” and “outsider,” he said.
“It was very stressful, but I had to stand up and be independent, ” Blanchflower said. “It was very hard; I felt the weight of the British people on my shoulders.”
Economics professor Eric Zitzewitz lauded Blanchflower’s choice to defend his unorthodox reasoning in the face of opposition.
“He’s comfortable being in the minority if he feels he’s right,” Zitzewitz said. “He deserves a lot of credit for that.”
The decrease in interest rates, from 5.0 percent to 4.5 percent, is “considered to be significant for any developed country,” said Elias Papaioannou, Dartmouth economics professor and former European Central Bank economist. He added that interest rates are usually raised or lowered, if at all, in margins of 0.25 percent. The Committee’s decision was made jointly with six other central banks worldwide, including the U.S. Federal Reserve, in an effort to ease the strapped global economy.
As London is one of world’s most important financial centers, the committee’s decision holds a great deal of weight in the global economy, Papaioannou said.
When the failure of the United Kingdom’s fifth-largest mortgage lender, Northern Rock, led to its nationalization by the British government in October 2007, Blanchflower read the warning signs and began voting consistently for a reduction in interest rates at monthly Monetary Policy Committee meetings.
Other economists on the Monetary Policy Committee may have been reluctant to follow his actions because banks sometimes fail without bringing the economy down, Zitzewitz said.
“They thought I was the ‘doom-and-gloom merchant’ but it exactly happened as I said,” Blanchflower said.
Blanchflower based his early calls to cut interest rates on both comparative analysis of the U.K. and U.S. financial systems and surveys conducted on how consumers and firms felt about the direction of the economy, he said. Blanchflower attributes his ability to see far into Britain’s financial future to his background in labor, microeconomics and macroeconomics, and also his expertise in data reading and analysis. His approach differed from that of other global economists who disregarded the survey results in favor of more widely accepted macroeconomic indicators such as payroll and unemployment statistics.
“I put a lot of faith in a number of qualitative or attitudinal surveys, which turn out to be pretty good lead indicators,” Blanchflower wrote in an article in the British newspaper “The Guardian” on Sept. 24, 2007. “It is also based upon my analysis of the recent changes in both the U.K. and U.S. economies in general and their labour markets in particular. What happens in the U.S. tends to be repeated six to nine months later in Britain.”
Although there are “various problems” with the qualitative surveys that may have caused other members of the committee to doubt their reliability, during turbulent periods, these indicators tend to react first, Papaioannou said. Using “macroeconomic aggregates” to predict behavior can also be problematic, Papaioannou said, because the data tends to accumulate slowly and revisions are often necessary.
The British economy’s high rate of inflation, currently at 5.2 percent, caused fears that a reduction in interest rates would drive inflation even higher, according to the Bank of England’s web site.
The Bank of England was made independent from the British government under the Bank of England Act of 1998. The Bank’s Monetary Policy Committee has the right to set interest rates to meet the government’s inflation target of two percent, using the Consumer Price Index as an indicator of inflation. The committee must keep the delicate balance between the danger of pulling inflation below the target rate due to a tightening credit supply and the risk of inflation remaining above target for an extended period, according the Bank’s web site.
The Committee decided to lower interest rates on Oct. 8 in order to stimulate interbank lending and increase liquidity in response to the global financial crisis.