Blanchflower says big rate cuts needed

By Sumeet Desai and Matt Falloon

LONDON (Reuters) - Two million Britons may be out of work by Christmas and big cuts in interest rates are needed now to stop the economy heading into a deep and prolonged slump, Bank of England policymaker David Blanchflower told Reuters.

In an interview on Thursday, Blanchflower said the Bank could no longer be complacent because the economy was already shrinking and a rate cut of more than 25 basis points was probably needed.

He said his own forecast earlier this year that house prices could fall by 30 percent was looking optimistic and that the jobless total could spike higher as construction companies and banks lay off workers.

His unemployment forecast would mean some 330,000 people losing their jobs in the second half of the year.

"The fears that I have expressed over the last six months have started to come to fruition," he said, speaking ahead of next week's Monetary Policy Committee meeting.

"I've obviously voted on quite a number of occasions now for small cuts but we need to act and we probably need to act in larger amounts than that. We need to actually get ahead of the game and it appears that we are now behind."

Blanchflower, a U.S.-based academic who has often been a lone voice on the MPC in calling for lower rates for 10 straight months, said Britain could learn from the action of the Federal Reserve and interest rates should be substantially lower than the current 5 percent.

The pound fell by about a third of a cent against the dollar after his comments reinforced market expectations that borrowing costs could fall before the end of the year and that sentiment on the MPC may be edging towards Blanchflower's view.