The Office of National Statistics revealed today that inflation fell to 3.4 per cent last month, and Artemis strategic bond fund manager James Foster says the impending deflationary environment will demand a response from the Monetary Policy Committee.
Foster says: “Money supply is falling like a stone and public spending is crowding private investors out of the bond market. As soon as there is a enormous cut in public spending and more quantitative easing, the private sector would get that artificial prop and could benefit from using the bond markets to grow businesses again.”
Fidelity asset allocation director Trevor Greetham agrees. He says the upcoming deflationary environment will force the Government to act to make sure it can continue to clear the deficit. He says: “We will be getting a cooling off period in growth and if there is no inflation on the scene the Government will be panicking. I think easing worked last time, it got assets and the economy moving, and I think we will need another dose of it.
“Inflation will come in the UK, but there will be cooling, more money will have to be printed and then we will have a recovery strong and sustained enough for wage increases. It won’t be in 12 months, maybe in five years.”
Foster would not put a figure on any possible easing injections to add to the current £200bn released by the Bank. He says: “The MPC will inject whatever is necessary, if they have to do £200bn then so be it. I wouldn’t support it, the affect on Sterling would be horrendous, but the Government will do it because it can and it will have to pull that lever.”
Greenham says deflation is a big concern across the developed world, especially in the Eurozone. He says to cut spending on the continent now may lead to a depression in the periphery of Europe.
He says: “The more you cut spending, the more taxes reduce and these countries will be running to stand still, much like what happened in America in the thirties. Monetary tightening in Europe now would be financial masochism; they are pressing the exit button at the wrong time. This will create a lot of volatility in the market.”