Further interest rates hikes would damage the economy and lead to negative inflation, delegates were told at last week’s MA Financial Media event Responsible Pathway.
Keynote speaker Trevor Williams, former chief economist at Lloyds Bank for a decade and now an author, academic and fintech company founder, said in his opening notes that inflation in the UK is high – it’s higher than the rest of the world – as policy was too loose for too long because the Bank of England focused more on money supply, not their remit for inflation.
“The danger zone now is if the Bank of England raises rates significantly again as they were too late to raise rates to start with. It should have been earlier when the money supply showed too much expansion. Rate changes have an effect 12-24 months later.
“Raising rates now would damage the economy by taking money out of people’s pockets. If rates hit 5.5% we will have negative inflation in two years’ time definitely – that’s a risk we run.”
See also: Inflation falls to single digits but remains ‘frustrating for policymakers’
Speaking to advisers at Horwood House, Milton Keynes, Williams said the UK is close to peak inflation, while some countries have passed that.
“Core inflation is still accelerating as food and energy price rises have spread to the services sectors, but globally inflation is coming down.
“This means interest rates will also peak and come lower. There will be incremental rises in some areas but the next big move in rates will be lower, it’s just a question of when.”
He added growth is a big concern in the UK as Brexit, the pandemic, lack of investment, an aging population and trade performance take their toll.
The ONS reported this Wednesday (14 June) that the economy grew just 0.2% in April, following a contraction of 0.3% in March.
“All top 12 economies by GDP will grow this year and next. UK will be stagnant this year and grow 1% next year, 1.5% the year after that.
“In the UK, the concern is growth is too weak. The effect of the oil shock and higher food prices means reduced income and spending power, investment growth has also been weak while public debt is high constraining government spending. The government says it will soon have more spending power but whether that happens is uncertain.
“There have been other shocks specific to the UK – Brexit – meaning not having unfettered access to export-oriented sectors has caused areas to suffer. Other economies are back at pre-pandemic level but the UK is underperforming as trade performance has deteriorated.
“We are also investing less than we used to in the UK. Businesses were struggling from this even before Brexit, more in the aftermath of the Global Financial Crisis. The big austerity had an impact on a range of public services. The UK should have been growing every year, as the demand on infrastructure has, but we have this aging population. We need improved quality of capital stock or we will get left behind.”
Look out for a comment piece from Trevor Williams exclusively for Portfolio Adviser in the coming weeks.
