The Bank of England "should and will" significantly cut interest rates in the coming months to tackle mounting domestic deflationary issues, Bill Mott believes.
Mott – the well-known PSigma Income fund manager – says a benign UK labour market, forecasted unemployment increases, falling house prices and reduced public spending are increasingly deflationary factors for the economy.
He says the only inflationary influences on the economy are coming from demand for food, energy and commodities in emerging markets.
“At present, in developed nations, there are virtually no inflationary pressures from internal sources,” Mott says.
“Quite frankly, it doesn’t matter whether UK interest rates are 5.75% or 3.75%: they will have no effect on the drivers of inflation.”
By not cutting interest rates aggressively enough, Mott believes the Bank of England is allowing money markets to dictate interest rate policy.
“In our opinion, the outlook for world markets is totally dependent on the actions of central banks and whether they correctly judge the appropriate monetary response to the current situation,” he says.
In the US, PSigma is forecasting significant interest rate cuts this year, allowing the country to avoid a recession.
“The current economic situation warrants significant interest rate cuts in the UK and elsewhere,” Mott says.
“Central banks will become increasingly aware of the necessity to cut interest rates in the next couple of months and they will move aggressively to do so. If they do not, then the outlook for markets will be bleak.”
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