Page last updated at 15:22 GMT, Thursday, 30 October 2008

Darling backs Bank's rate policy

Bank of England building
The Bank's anti-inflation fight has been backed by the chancellor

Chancellor Alistair Darling has reiterated his support for the Bank of England, despite criticism it has been focusing too much on inflation.

Mr Darling said there was no reason to change the Bank's main goal of keeping inflation close to 2%.

But he said there was "discretion about the horizon over which inflation is brought back to target".

One former Bank member said this meant a rate cut would be consistent with the government's wider economic goals.

Dr DeAnne Julius, a former member of the Bank of England's Monetary Policy Committee, said the chancellor had given "a pre-emptive signal" a rate cut would be consistent with the government's aims "even if inflation were to remain above its target for longer".

"Having said that I don't expect inflation to remain above 2% for long, given the speed at which we are sliding into a recession," she said.

'Deep recession'

Mr Darling used a speech in the City of London on Wednesday to reaffirm his support for the Bank of England, which is tasked with meeting the government's inflation target.

He said: "The global challenges we face today are no reason for changing the remit of the Bank of England. The objective, price stability, is the right one. The means of achieving it, by inflation targeting, is right too."

However, he said that while inflation in the UK would come down to the government's target, there was also discretion about the time period during which price rises were curbed.

Maintain stable prices and thus confidence in the pound
Set interest rates to meet UK's inflation target
Current inflation target is 2%, plus or minus one percentage point
Maintain stability of the financial system as a whole

Later, he told the BBC the Bank was acutely aware it not only had to target price rises, but also had "to look at what is going on in the wider economy".

Meanwhile, the current financial crisis may be more far-reaching than even the 1929 crash, a Bank of England policymaker has warned.

Professor David Blanchflower - who has often been a lone voice in urging rate cuts and is a member of the Bank's Monetary Policy Committee - said big interest rate cuts were needed to avoid a deep recession.

"If rates are not cut aggressively, we do face the prospect of a relatively deep and long-lasting recession," he said.

UK rates are at 4.5%, after the Bank cut them by half a percentage point earlier this month.

The cut was part of a co-ordinated move with both the Federal Reserve and European Central Bank (ECB).

On Wednesday, the Fed cut its key rate further, to just 1%.

'Synchronised downturn'

Professor Blanchflower's comments follow those recently made by Bank of England governor Mervyn King and Prime Minister Gordon Brown that the UK is probably heading towards recession.

Professor Blanchflower warned international financial problems could turn out to have long-lasting repercussions.

"It is even possible that this event may turn out to be more significant than the 1929 crash which primarily involved bank failures in the United States," he said.

Two companies that I have worked for have either closed their doors or laid people off.
Marie, Atlanta, USA

"The current difficulties in financial markets are more global in nature and more comparable to what happened in the First World War."

He also said a range of surveys of UK economic activity had shown a marked downturn since last summer.

"It is not sufficient to consider the data month by month until it emerges that the UK is in recession.

"I believe this trend has been apparent for some time. The synchronised downturn in so many business surveys should have led us to realise sooner that the UK economy was entering a recession."

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