PSigma income fund manager Bill Mott says the Bank of England should raise interest rates when inflation falls below 2 per cent.
Inflation has fallen rapidly from a peak of 5.2 per cent in September 2011 to 3.4 per cent in February. Last month, BoE chief economist Spencer Dale said he expects UK inflation to hit its 2 per cent target by the end of 2012.
It is widely predicted that the bank will not raise interest rates until 2014.
Mott says: “At some point you have to normalise interest rates. It is my contention that if inflation falls and the squeeze on real disposable income lessens, the BoE should normalise interest rates. If it does not and should global growth occur, oil, food and other commodities will act almost as a central bank by their own prices rising and squeezing real disposable income, pushing inflation up again. I do not think the bank will raise rates and that will be a policy error.”
Henderson chief economist Simon Ward says: “I do not think inflation will fall below 2 per cent, given current policy settings, and I strongly doubt the BoE would respond by hiking rates.”
For a full interview with Bill Mott see next week’s Money Marketing.