Today's quarter per cent rise in interest rates won't be enough to stave off inflationary pressures and should have been bumped up by 0.5%, according to F&C's Ted Scott
“Many people will be expecting another 0.25% rise after today’s rate hike but a bigger than expected 0.5% rise would have been more effective in slaying inflationary pressures than this incremental approach,” says Scott, who is fund manager of the F&C UK Growth & Income, Stewardship Income and Stewardship Growth funds.
“The Retail Price Index, in my view the most indicative measure of inflationary pressures, is running at around 4.8%. This has been driven up by price rises in gas and electricity and other non-discretionary items, in turn driving households’ inflation expectations up to levels not seen for many years.
“Unfortunately, what people expect is often more important than the real measure of inflation as witnessed by the rise in higher wage demands which will itself exacerbate inflation further,” says Scott.
From an investment perspective, housebuilders and consumer sensitive stocks such as general retail would be most affected by today’s rate hike but that the effects were unlikely to be significant.
“A 50 basis point increase would have shown consumers that Mervyn King and the MPC mean business and that they are serious about nipping the problem of inflation in the bud.
"Instead, with the recent rises in the price of oil combined with relatively high consumer spending and a resilient housing market, neither of which are likely to be greatly affected by today’s decision, inflationary expectations are likely to continue to dog the economy,” adds Scott.
“However, with a negative yield on property, which is likely to fall yet further, the buy-to-let segment of the property market is looking increasingly fragile and those investors unable to generate a yield from rent could be forced to sell.
“This poses the threat of a potential crash in the housing market. If rates are hiked a second time later this year, general retailers such as Marks & Spencers and Next could see sales dip and financial stocks such as banks and other lending institutions could also be affected,” he warns.
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