M&G head of retail fixed interest Jim Leaviss has warned the Bank of England would cause “GDP suicide” if it raises interest rates in the near future.
He 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 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, but the inflation concerns in the UK are more pressing, given the BoE has continually missed its 2 per cent target.
Leaviss points to the fact that inflation has been above 3 per cent for most of 2010, with RPI inflation standing at 4.7 per cent. He adds that the 2.5 per cent VAT rise is set to feed into markets.
Leaviss says the money markets are already pricing in two 0.25 per cent rate increases in the UK this year, with a small chance there will be a third rate rise by year end.
He 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.”