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Jim Leaviss warns against rate hike

M&G head of retail fixed interest Jim Leaviss says Bank of England policymakers risk putting Britain into the same situation Japan faced in the mid-1990s if they start to hike interest rates.

Speaking at the Fund Strategy Investment Summit in Kitzbühel, Leaviss highlighted the fact that in the mid-1990s Japan saw a number of robust quarters of growth only for its government to hike consumption tax in 1997.

He said: “Japan hiked consumption tax in the same way the UK hiked VAT from 17.5 per cent to 20 per cent and for Japan it had an immediate affect on economic growth, by comparison the UK had a poor fourth quarter of growth in 2010 in anticipation of the VAT rise and the austerity coming. Japan was back in outline outright deflation within a year or so and had a quarter of GDP growth that was down almost 2 per cent in 1998.

Leaviss said Bank of England historical policy errors mean it has lost its credibility to avoid hiking rates this year. Leaviss expects a rate rise to come in about June, which he said would be exceptionally bad news for the British economy.

He said: “I think the BoE is in a terrible position having made policy errors historically by keeping rates too low in 2005, as this was a time when we had very strong domestic inflation but we had massive imported goods price deflation. This was when China was exporting cheap goods and the bank didn’t do anything because it thought we had deflation from import prices that outweigh the inflation we were seeing at home.

“We are now in the opposite position where we have imported goods inflation and domestic weakness, so the BoE wants to remain symmetrical about what it does, meaning it should be hiking interest rates now, but really it should have been hiking interest rates back then and we would have avoided the housing bubble and some of the credit crisis.”


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There are 6 comments at the moment, we would love to hear your opinion too.

  1. After the credit crisis of 2007 what happened with interest rates in 2005 was of no consequence. What made matters worse was that the BOE were still fretting about inflation in July 2007 and increasing rates just at the time the USA had started on its policy of drastic cuts, more aware of the implications of the sub-prime crisis. The BOE was adrift then and didn’t cut fast enough and talk of rate increases now means it has still not understood the severity of the situation. How crazy – to raise VAT by 14.29% (that’s 2.5 of 17.5) and then worry about inflation!

  2. I though the idea of increasing interest rates was to curb consumer spending. But I thought we were being encouraged to spend more to generate growth. I thought the current inflation was down to global prices & the VAT rise so how does increasing interest rates in the UK solve that? Sending messages is one thing; having any practical effect is another.

  3. A weak pound, so imported inflation eh – strengthen the pound and lower commodity prices – maybe – but will those lower prices be passed on – I doubt it! Be warned – increase interest rates and wage inflation to follow – that should work wonders for domestic inflation and the country’s economy – not!

  4. Agreed. My vote is to put Jim on the MPC

  5. Any sensible monetary policy should take full account of the IMPACT of the tightened fiscal policy (both objective and subjective impact) and should only target the structural inflation which will endure beyond January 2012. Generally, rising rates take time to work but in the current fragile conditions, they may work far quicker to wreck the remaining confidence. My penny is on rates staying low for some time.

  6. Structural inflation is currently running at around 1%, so to put rates up when this is so low and China and India are increasing rates to slow their inflation is beyond me. Oil will drop later this year as will commodities. Next year could see deflation not inflation. The BOE need to ignore the press at all costs, they have no clue at all. An increase in interest rates is designed to reduce broad money supply, they would be better taking out the £200 billion that they pumped in first.

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