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Ward says cut back M4 rather than raise base rates

New Star chief economist Simon Ward says a deterioration in company liquidity should prevent the Bank of England monetary policy committee from raising base rate this summer.

He says markets are now discounting two 0.25 per cent rate rises in the next year but monetary trends show that policy is already restrictive.

Ward says: “The foundations of the current inflationary upsurge were laid in 2005-07 when the broad money supply M4 was allowed to grow at a 12-13 per cent annualised rate.”

He considers that to return inflation to the 2 per cent target over the medium term, the rate of M4 expansion needs to be brought down to 6-8 per cent a year. “The slowdown should be gradual – a collapse in money growth would risk transforming a painful economic adjustment into an unnecessary bust,” says Ward. He adds that M4 was still rising at an annual rate of 11.2 per cent in April but has been inflated by financial transactions related to the credit crunch.

He says: “Annual growth in M4 holdings of private non-financial corporations has slumped from a peak of 16.1 per cent last May to 1 per cent in April. Relative to retail prices, real PNFC M4 is contracting at the fastest rate since the early 1990s, suggesting growing risk of a slump in business spending.”

Ward believes that the MPC has little choice but to sit on its hands for the foreseeable future.


Downsize your portfolio

The average UK smaller companies manager will outperform their benchmark, the FTSE small cap index, over most periods – in fact, by 29 percentage points over five years and 79 percentage points over 10 years to May 1 whereas the average UK equity unit trust has underperformed the FTSE All Share index by 10 percentage points over five years and 50 percentage points over 10 years.

Shareholders are set to challenge Kilminster deal

Shareholders and former Kilminster advisers are investigating taking legal action against Malcolm Kilminster over the recent deal between Kilminster Financial Management and Alpha 2 Omega after it emerged that KFM looks set for liquidation.

Leading Edge – April 2017

There is little doubt 2017 will be a year of political uncertainty. Leading Edge is Royal London Asset Management’s regular review of investment markets. This edition explores some of the impacts that this uncertainty is having on investors, from the pitfalls of prediction within UK equity investing to the dangers of opting for convenience over […]


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