'Zombie households' would not cope with rate rise
Fund managers warned "zombie households" would not be able to cope with an interest rate rise, meaning the Bank of England (BoE) is unlikely to tackle high inflation in the near future.
Interest rate rises to control above target inflation levels are unlikely in the near future as many households would not be able to cope with the effect this would have, fund managers have warned.
Speaking at a Fidelity Funds Network investment debate yesterday (29 March), Ian Spreadbury, manager of Fidelity International’s MoneyBuilder Income Fund and Strategic Bond fund, said that inflation was "generally unfair" as it caused people on fixed incomes to lose out and people with assets to gain.
"It is not stable, it tends to get out of control and it always ends in a bust."
However Mr Spreadbury said the BoE was unlikely to adjust its current monetary policy to tackle inflation because of the spectre of "zombie households".
"People are at the edge of what they can afford to pay right now and even modest increases in the base rate could see a catastrophic fall in house prices.
"The UK economy is incredibly sensitve to rate rises. I would be very surprised if in a years time rates were any higher than one to 1.5 per cent more."
Mr Spreadbury's sentiments were backed by Azad Zangana, European economist at Schroders.
"House prices are really feeling the strain so the BoE will at least wait to see what happens to the first quarter GDP numbers, which come out in April, before looking at raising rates."
Jim Leaviss, head of retail fixed interest at M&G and manager of the M&G UK Inflation Linked Corporate Bond fund, said the current situation in the UK could be distinguished from the days of the Weimar Republic, where people went around with wheelbarrows of money and from soaring inflation in the 1970's.
"In the 70's the power of the unions meant they were able to push through wage rises which accommodate inflation. This period also saw the deregulation of banks so the availability of credit stoked up inflation."
Mr Leaviss said neither of these factors were coming into play in the current economic situation.
Tom Stevenson, investment director at Fidelity Investment Managers, agreed it was likely the BoE's Monetary Policy Committee was for now content to write a letter to the Treasurer each month explaining why inflation was above target.
He said: "The potential for them to get it wrong is enormous at the moment."
