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Fund managers split on UK inflation outlook

Fund managers have a mixed outlook on the future of UK inflation, after the consumer prices index remained unchanged at 2.7 per cent.

In its recent Inflation Report, the Bank of England said inflation is likely to remain above the 2 per cent target until 2015 and peak at 3.2 per cent. But earlier this month Chancellor George Osborne called for the Bank to loosen monetary policy in order to boost the economic recovery.

PSigma Asset Management Income fund manager Neil Cumming, who co-manges the Income fund with Bill Mott and Eric Moore, says inflation has been a big concern for fund managers in recent months but does not see a strong likelihood of it rocketing out of control.

He says: “We put a 55 per cent probability on [muddle through]. Another possibility is we get a deflation – which we give a 10 per cent chance – and the balance to that is there is a 35 per cent chance we would get inflation.”

Cumming says the danger is the QE money is sitting in the system and, if it starts to be used by the banks, it could become inflationary.

“There seems to be no active way forward to suck the liquidity out of the system. The path back to normality looks fraught,” adds Cumming.

AXA World Funds Universal Inflation Bonds fund manager Jonathan Baltora believes QE is working better than a lot of market players may think and expects to see inflation forecasts consistent with the BoE inflation targets.

“We have estimated that in most advanced economies 1 per cent to 2 per cent more inflation will have a significant impact on the debt to GDP trajectory meaning that there is an incentive for central bankers to tolerate more inflation,” he adds. “Flexible inflation targeting means more inflation and also probably more volatile inflation, hence the need to be protected.”

However, Baltora also notes that “a clear upward inflation risk” over the next 12 to 24 months has been created by the recent depreciation of the pound .

Allianz Global Investors senior portfolio manager multi asset David Hollis says inflation is expected to rise to at least 3 per cent by the summer.

Hollis says: “To help steer the economy back onto a sustainable debt path the BoE has generated higher nominal growth in the UK by allowing inflation to run above target since 2010.“

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