Warning of 60,000 lost jobs a month hits pound

Bank of England member David Blanchflower today warned Britain is heading for a "horrible" unemployment surprise.

His grim verdict sent the pound crashing to a two-and-a-half year low against the dollar as fears of a full-scale recession intensified.

Mr Blanchflower said the number of unemployed will rocket next month as thousands of school and university leavers who have failed to find jobs register. He forecast unemployment will rise by 60,000 or more a month for "several months" and could hit two million by Christmas. Unemployment is currently at 1.67 million and rising by 20,000 a month.

"My concern is that we will see this coming quite quickly," he said. " October numbers... you will start to see quite a big kick-through and that will be an unpleasant shock."

Mr Blanchflower, the arch-dove on the Bank's Monetary Policy Committee who has voted for a cut in interest rates every month this year, also forecast recession by the end of the year. "I do have a somewhat more doom-laden view on the potential outlook," he said. "My view is certainly that we are going to see a large increase of unemployment.

"I don't think we are going to see a flat period of growth. I think we are going to see a deeper decline than others think and the pullback is going to take somewhat longer to come."

Mr Blanchflower was alongside Bank Governor Mervyn King, answering questions from MPs on the Treasury Select Committee on inflation, which is running at a 16-year high of 4.4 per cent, well above the two per cent target.

Figures out next week are likely to show yet another rise in inflation, making it even harder for the Bank to cut interest rates from the current level of five per cent despite the looming recession. Some economists are forecasting a cut to 4.75 per cent in November.

A Bank survey today showed that last month the public thought inflation was actually at 5.4 per cent - a sign of how much households are feeling the pain of rising bills and food prices.

Mr King said: "We are in testing times. But our medium-term framework was designed to cope with such times. Provided we focus on bringing inflation back to target, our present difficulties will prove to be temporary. Inflation will fall back, and growth will resume."

Mr King will have to write a letter of explanation to Chancellor Alistair Darling if inflation remains so high.

"We face a difficult but temporary period during which inflation will remain high for a while and output growth at best weak," he said. "It would be most surprising if, next week, I were not required to write a further open letter to the Chancellor."

Deputy Governor Charlie Bean warned the crisis was far from over. "We thought a year ago that this crisis might be over by Christmas like the First World War, but as it has gone on we have realised there are far deeper problems that will take longer to unfold," he said.