There is not a “snowball’s chance in hell” that the UK base rate rises to 2 per cent this year, despite the market currently pricing in that scenario, according to Stephen Snowden, head of fixed income at Artemis.
UK government bond yields have been rising in recent months to reflect the reality of higher inflation and base rates.
But Snowden said the market has been presently pricing in inflation remaining at elevated levels for a long time, and so believes this will prove transitory and force central banks to be more cautious on rate rises.
He said: “To a large extent, inflation is the cure for inflation, as we are now seeing with higher supply-side inflation causing economic growth forecasts to be revised downwards.
"That will, in time, lead to inflation falling from the demand side."
He said it was also worth noting that the Bank of England has said it will also use quantitative tightening to address inflation, not just interest rates.
Snowden added: "I think it is accepted now that policy makers should have tightened policy earlier, and they are now playing catch-up.
"But I think a combination of using quantitative tightening and the more transitory nature of the inflation means there is not a snowball’s chance in hell we get rates at 2 per cent this year.”
Julian Jessop, an independent economist, said that rapid expansion of the money supply over the past 18 months had helped to create the much higher inflation we are experiencing now, but that more recently, as a result of central bank action, money supply growth has slowed dramatically, and this should lead to inflation falling soon.
In the spring statement, the Office for Budget Responsibility forecast that inflation would peak at 10 per cent in the UK this Autumn, before dropping back, but still estimated it would average 7.4 per cent this year, higher than the present 6 per cent level.
James Klempster, deputy head of multi-asset at Liontrust, is quite optimistic on the economic outlook, noting that “while growth forecasts have been cut, the actual level of growth is still higher than we have seen for most of the past decade.
"While inflation is high, there are few signs so far that it is becoming entrenched in the system. The factors that are causing the inflation are transitory, really they are a series of transitory factors that will wash through the system.”
Counting the cost
Thomas Wells, who runs the inflation linked bond fund at Sanlam said producer’s reaction to the current higher inflation may itself cause inflation to last longer.
He said: “Perhaps the more worrying issue is what businesses and companies do in response to soaring prices.
"In the agricultural sector, we are hearing that farmers are choosing not to plant crops because energy and fertiliser prices are unaffordable, and/or they are concerned that, come harvest time (when energy prices may have moderated) food prices may also have dropped and they won’t be able to recoup the huge outlays that need to be made now.