View more on these topics

M&G’s Leaviss warns that BoE could be on the brink of policy error

M&G head of retail fixed interest Jim Leaviss has warned that the Bank of England could make a policy error  by hiking interest rates in the near future.

Leaviss believes we may be seeing a re-run of the 1993/94 economic scenario, when bonds rallied hard in 1993 before the Fed unexpectedly hiked rates in February 1994, resulting in a 200bps sell off in 10 year Treasury yields.

He says while the Fed may wait for unemployment to fall further from its current level of 9 per cent, as it has in the past two cycles, the inflation concerns in the UK are more pressing given that the BoE has continually missed its 2 per cent target, pointing to the fact that it has actually been above 3 per cent for most of 2010.

Leaviss points to RPI inflation standing at 4.7 per cent, while the 2.5 per cent VAT hike is set to feed into markets.

He says the money markets are already pricing in two 0.25 per cent rate hikes in the UK this year, with a small chance that there will be a third rate hike by year end.

Leaviss says: “Rate hikes would kill core inflation but they would also be GDP-suicide in this fragile economy, bringing deflation risks back into play. Hopefully the Bank still feels it can target future inflation, and has the confidence to ignore those reacting to current inflation newsflow and calling for imminent rate hikes. But I don’t think that the Bank of England has much breathing room left, and with persistently high current inflation the Bank’s credibility is under attack. I think we’re only one surprisingly robust inflation print away from a UK rate hike.”

Recommended

LibDems turned down King briefing in coalition talks

Liberal Democrat MPs negotiating the coalition deal twice refused to be briefed by the governor of the Bank of England for fear of feeling pressurised into policy decisions, according to LibDem MP David Laws. Writing in his book, 22 Days In May, published by Biteback Publishing, Yeovil MP Laws, who led the LibDems on economic […]

Bond outflows

Net retail sales of sterling corporate bond funds turned negative in November last year, according to the latest IMA statistics. The sector saw outflows of £215m, making it the second least popular sector, just above Europe excluding UK.

Final frontier

John Kenchington says more exotic regions could lead emerging markets over the coming year

Investment clock economic update

In the latest Investment Clock economic update, Ian Kernohan, Senior Economist at Royal London Asset Management, discusses the implications of the US Federal Reserve’s recent hike in interest rates and upcoming French presidential election. The value of investments and the income from them is not guaranteed and may go down as well as up and […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment