manager says failure of mpc to raise rates in past may lead to future problems
The next movement in interest rates will be down not up as previously expected, according to Patrick Evershed.
The Bank of England (BOE) added further fuel to the speculation earlier this month with its dovish August Inflation Report, in which it downgraded its forecast for economic growth in coming quarters.
The BOE now expects annual GDP growth to pick to around 2.75% over the next 12 months, down from predictions for 3% or above in its May report, and notes that further downside risks remain.
Importantly, inflation is also expected to remain around the bank's 2.5% target rate, giving the MPC room to further ease official interest rates from 4%, where they have been since November 2001.
But concerns about the domestic property market are leading some to question the wisdom of additional easing.
Evershed, manager of New Star Select Opportunities, said he expects a rate cut before the end of the year but is worried about the ramifications such a move would have on the property market. He said an upward rate move last year would have nipped the boom in the bud but to raise rates now would be very dangerous given the weakness of the stock market.
Evershed said: 'My guess is that before the end of the year there will be a rate cut in order to stimulate the economy as a whole. It is dangerous though because of the rise in house prices. Asset bubbles are nasty and always burst.'
Bill Mott, manager of Credit Suisse Income and Higher Income funds, is more scathing about the idea of lowering rates, believing the move is a recipe for a hard landing in the property market.
Mott said: 'Interest rate cuts would be inappropriate. The cut should have come last year but they missed the chance and now we have an asset bubble. The problem is the authorities have been very asymmetric in their attitude to the economy. Every time they got in trouble they decreased rates and now they should raise them. If they cut them now what will that do to the housing market?'
Richard Buxton, UK fund manager at Schroders, said a divergence in views on whether interest rates were likely to be cut, held or raised, was one reason for the current level of volatility in the market. Buxton said that while corporate expenditure remains depressed, the economy is too reliant on consumer spending, which is already showing signs of slowing.
He added: 'There is no requirement to raise rates in order to kill the housing market, because there is nothing like the excess there was in the late 1980s and it will slow in any event over the next 12 months.
'Moving forward, a rebalancing of growth through rises in corporate expenditure is needed before any rate increase to quell the housing market.'
David Lis, UK fund manager at Morley, said the MPC might come under pressure to cut rates to meet inflation targets.
While he accepts this could be damaging to the housing market, he said a temporary measure such as raising stamp duty should be employed to curb the ongoing asset bubble as a rate rise would be detrimental to any form of recovery. Moreover if the US and European Central Bank were to cut rates, the pressure would be on the UK to follow suit.
He said: 'If Europe cuts rates and ours remain where they are, then we would probably see sterling strengthen which could drive inflation even lower and probably tip the UK into recession.'
James Abate, US fund manager at GAM, said rates are likely to remain stable over the coming year because the problem is more sentiment than liquidity driven.
He added the macro economic data did not yet point to a double dip recession and the Fed would probably look to reserve the rate cut as a last ditch measure should the macro picture weaken further.
Abate said US unemployment is stable at 6% and the markets just need time to stabilise.
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