Only dovish Blanchflower got it right on urgent need for rate cuts

The dramatic decision by the Bank of England to slash interest rates from 4.5% to 3% may have smacked of panic, but it was long overdue and marked a significant victory for one man in particular.

David "Danny" Blanchflower, the arch-dove of the monetary policy committee, has voted for a rate cut every month since the run on Northern Rock in September last year but has seen his argument fall on deaf ears.

Blocking the cuts were Threadneedle Street hawks such as Governor Mervyn King and Andrew Sentance. But no one was more hawkish than Tim Besley, the professor from the London School of Economics who voted for rate rises as recently as July and August this year.

Besley's fear was that runaway inflation would destabilise the economy, and until recently saw little threat of recession. Blanchflower's concern was that the downturn would be so bad, inflation would fall dangerously low.

In July, when Blanchflower voted for a rate cut and Besley a rate rise, the Evening Standard suggested one of them was right, but the other seven members of the MPC did not know which. It has now become patently clear, putting the Bank of England under the most intense scrutiny it has faced since it was granted independence in 1997.

It took the near-collapse of the financial system on both sides of the Atlantic for Besley and others to realise that the threat to economic stability was not in fact inflation but recession or even depression. He finally voted for a rate cut last month, and one can only assume he did so again yesterday (the minutes will tell us when they are published later this month).

City reaction to the rate cut underlined just how wrong Besley has been. Even as commentators heaped praise on the MPC for its bold and daring move, the markets went into a tailspin.

"It's being seen as a bit of a panic move," said Mic Mills, senior trader at ETX Capital. "Long-term it's the right decision and we need monetary loosening to give the economy a boost. But traders are thinking, if we've really got to cut rates to 3%, then how bad is it out there? Recessionary fears were bad before - they just got a whole lot worse."

Also of concern is the speed of the Bank's response to the recession. If 3% is the right level for interest rates now, why were they at 5% little over a month ago? Critics claim the Bank was caught napping, or in the jargon, "behind the curve".

"There is a growing feeling that the MPC has misjudged the severity of the recession," said Edward Menashy, chief economist at Charles Stanley.

Inflation has been above the 2% target for 28 of the last 36 months and all of the last year, hitting a 16-year high of 5.2% last month. Under such circumstances, the MPC was reluctant to cut rates and Besley has voted for 10 rises and three cuts in 26 meetings since joining the MPC. However, at the same time as inflation was rising, the housing market has been in decline, key planks of the economy have plunged into recession, unemployment has risen, and the economy has been brought to its knees. Furthermore, inflation looks to have peaked.

Blanchflower, an economist who specialises in the jobs market and splits his time between New Hampshire and London, closely watched the meltdown in the US, warning Britain was only a matter of months behind. He has also forecast unemployment to hit more than two million by Christmas.