While Mark Carney did not actually say or do anything regarding a date for the first UK interest rate rise, to some his comment that “the process of adjustment will likely come into sharper relief around the turn of this year” indicated that the initial hike may be coming sooner than anticipated i.e. sometime in November.
However, Coombs, Rathbones’ head of multi-asset, believes that not only would it be “crazy” to bring forward the interest rate rise, but the current state of the UK economy is too unstable to facilitate one for at least the next year.
“The UK rate rise is unlikely to be in November, and it would be crazy if it is,” he said. “The UK economy is not robust enough to take an interest rise.
“Interest rates should not rise for the next 12 months. Unless we see inflation heading towards 1.5%, there is absolutely no reason why the interest rate should rise.”
Citing the UK economy’s unstable footing as the base of the issue, Coombs explained that to introduce an interest rate hike while there is no discernible pressure on inflation would leave the government and the Bank of England at crossed purposes.
“We are still in austerity and the government is still contracting fiscal policy,” he expanded. “To contract monetary and fiscal policy at the same time in these early stages of recovery while there is a budget deficit would be a very strange thing to do.
“I am bearish on rates, and it is really odd in a sub-par recovery to increase rates alongside decreasing government expenditure. The government may continue to cut spending and the oil price is still low, so there is no pressure on inflation.”
While Coombs conceded that real wages in the UK recently climbed to their highest level for four years – with wage growth hitting 2.7% in April – he believes that this alone does not negate the overall fragility of the economic recovery.
He said: “Though there are some signs that we are starting to see some wage growth it is still early in that trend, and unless there is an incredible amount of wage inflation, interest rates should not increase until at least the second half of 2016.
“That is not to say that the Bank of England will not do it to get ahead of the curve, but they should not, and there is a case for saying that the interest rate should stay where it is for the next 12 months.”
