Rate-setter warns of 'false dawn'

Mr Blanchflower chose not to renew his term at the Bank.

The Bank of England official who warned of recession has said that the worst of the downturn is not over and signs of improvement may be "false dawns".

David Blanchflower was a lone voice on the Bank's Monetary Policy Committee (MPC) calling for interest rate cuts as he accurately predicted the recession.

Speaking at the end of his stint on the MPC, he said signs of green shoots in the economy were "tentative".

He said rising unemployment meant that the UK economy would remain "tough".

Mr Blanchflower, who is professor of economics at Dartmouth University in the US, will be replaced on the MPC by David Miles after choosing not to renew his term.

'Disappointed'

While other members of the MPC had been concerned about oil prices and inflation, Mr Blanchflower had voted for the MPC to cut interest rates since early 2008, having warned on the risk of recession.

Rates were as high was 5% until October 2008, before they began to be cut sharply in a bid to stimulate the economy.

By March they had been cut to 0.5% - the lowest point in the Bank's 315-year history. The Bank also signalled the start of an untried policy - quantitative easing - to try and kick-start lending.

"The thing I'm most disappointed by is that I was unable, in the early parts of 2008, to persuade my colleagues to vote along with me that we should be cutting rates earlier," Mr Blanchflower told the BBC.

"My strongest contribution was to see what had gone on in in the US, realise that recession was coming and call it earlier than others. My weakness was that we didn't do this early enough.

He added that while "clearly" his colleagues had not been listening to him, the media and others had not believed him either.

'Not out of it'

He said that the UK was "pretty deep" into a recession but that there had been some signs around the world that the speed of decline had slowed.

"But we're not out the wood yet these green shots are very tentative, and it may well be that we are seeing false dawns," Mr Blanchflower added.

"People feel a little better because they've had rate cuts, and their mortgage rates have fallen.

"But there are many months yet of rising unemployment to come. This is going to be tough for people. Perhaps we'll see some improvement in the coming months but we're not out of it yet."

He said that consumer price inflation (CPI) - currently at 2.3% - would keep falling and was likely to go below 1%.

The Bank now has the dilemma of whether or not to raise interest rates again to try and fend of the risk of negative price growth.

"The bank has the tools to resolve the problem," he said.

"The difficulty is that you don't want to kill off any green shoots too soon because recovery is certainly not strongly entrenched in the economy right now."