While the imminent US interest rate rise is the hike currently dominating board room discussion, its UK counterpart is still simmering in the background.
But despite the Federal Open Market Committee and markets in general fretting over whether US economic data is strong enough to withstand an immediate rate hike, Dixon, manager of the Man GLG UK Income Fund, says that the concerns should not extend to UK policymakers.
“People that say the UK economy cannot take an interest rate rise are wrong,” he said. “That view needs to be challenged during the next year, and I think the perception will change.”
Dixon outlined three key drivers of the UK recovery which he believes negates arguments for the Monetary Policy Committee holding back on kick-starting the UK rate cycle – debt, household income and consumption.
“For the first time in 30 years there are less loans than deposits,” he expanded. “Debt levels are around 15% lower relative to incomes and GDP than they were last year, while the loan-to-deposit ratio is astonishing.
“In the course of the next year we will see consumer cash flow driving a reasonably robust recovery in the consumer economy; we are clearly getting wage inflation, and we will lose the base effects of falling food and oil prices.
He continued: “Also, looking at household income, the key statistic is the amount of money that each household is feeling better off by in relation to last year, which is up almost £1,500 year-on-year. Transposed across UK households it adds up to around a £40bn improvement in total spending power.
“We could have CPI inflation print and wage inflation of more than 3%, and if the banks are not wrapped up by the regulator they could be lending again. While it is a simplistic view, by definition an interest rate rise would be beneficial to the UK economy.”
Furthermore, while Dixon stopped short of outright condemnation of the MPC’s ‘slow and steady’ rate hike outlook, it is not a policy in which he has complete faith.
