(Adds Darling on quantitative easing)
By Sumeet Desai
LONDON, Dec 10 (Reuters) - Bank of England policymaker David Blanchflower will step down from the central bank's interest rate-setting committee when his term expires on May 31, 2009, the government said on Wednesday.
In a further shuffling of the BoE's decks, Paul Tucker will take over as Deputy Governor for Financial Stability from John Gieve, who is stepping down in March, giving him a pivotal role overseeing Britain's shaken banking sector.
Currently executive director for markets and a member of the central bank's Monetary Policy Committee (MPC), Tucker has worked at the BoE in a variety of roles for almost 20 years.
Blanchflower, an arch-dove, joined the MPC in June 2006 but hit the headlines this year as his dire warnings about the economic outlook came true.
The U.S.-based academic has long said the British housing market could crash and interest rates needed to be brought down dramatically if the country was to avoid a painful recession when many of his colleagues were considering hiking rates.
After being a dissenting voice on the inflation-focused MPC for many months, Blanchflower's views have gained prominence as Britain slides into its first recession since the early 1990s.
The BoE has cut interest rates by a total of 3 percentage points since October and is expected to continue cutting them.
In testimony to lawmakers, finance minister Alistair Darling dampened media speculation that the BoE could resort to increasing money supply -- quantitative easing -- to stave off the threat of deflation as the economy contracts.
"Interest rates are at 2 percent, they have some way to fall," Darling said. "This is pure speculation ... and not something people should get too excited about."
"Anything like that certainly would (require Treasury approval)."
DOVE FLIES THE NEST
Blanchflower said he always only wanted to serve a three-year term and wants to step down because of the travel burden -- he comes to Britain at least once a month for MPC meetings from his U.S. home.
"My term on the MPC runs out on 31 May 2009. I am writing to inform you that I will not be seeking a renewal. My intention all along was to only serve a single term, having been given three years sabbatical leave from Dartmouth (College, New Hampshire). I will, of course, complete my full term," Blanchflower said in a letter to Darling, released to the media.
"I very much support the remit that the MPC has been given. It allows for the flexibility which is crucial in these tough times. I have much valued the independence given to me as an external member of the Committee. It is crucial that membership of the MPC fully represents a broad range of views."
Darling thanked him for his contribution in a reciprocal letter.
"In these difficult times, it is important that we have people that energetically put forward expert and challenging analysis and views to help shape the debate," Darling said.
Tucker will continue as a member of the MPC in his new job and the BoE will also appoint a replacement for him as director of markets in due course.
"I'm privileged to accept the role of Deputy Governor and look forward to working with the Governor and the Bank team, the Tripartite Authorities, market counterparties and overseas central bank colleagues to address the financial stability challenges ahead," Tucker said in a statement.
In his testimony, Darling said the next year would be tough for the British economy and that the risks to growth far outweighed any lingering concerns about inflation. (Reporting by Sumeet Desai, editing by Mike Peacock/Victoria Main)