F&C growth and income manager Ted Scott has hit out at the Bank of England’s monetary policy committee for raising the base rate by just 0.25 per cent.
Scott says although rates are now at 5.5 per cent, the highest level since 2001, the committee could have gone further to tackle inflationary demands, meaning another rise is almost a certainty. He says many people will be expecting another 0.25 per cent rise after this month’s hike but a 0.5 per cent rise would have been a more effective response to inflationary pressures.
Bank of England governor Mervyn King had to write a letter to the Chancellor explaining how inflation reached 3.1 per cent, one point over the target 2 per cent, a first for the MPC in 10 years.
Scott says the base rate rise will have the greatest effect on general retail stocks but will not have a wider impact. He says: “An increase of 50 basis points would have shown consumers that Mervyn King and the MPC mean business and are serious about nipping the problem of inflation in the bud. Instead, with recent rises in the price of oil combined with relatively high consumer spending and a resilient housing market, neither of which are likely to be greatly affected by the 0.25 per cent rise, inflationary expectations are likely to continue to dog the economy,”
New Star chief economist Simon Ward says: “A bank rate of 5.5 per cent is modest by historical standards but represents a heavy burden on consumers carrying record debt. Interest payments will soon absorb nearly 10 per cent of household income – a higher proportion than in 1998 when official rates reached 7.5 per cent.”