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How high will the Bank of England take rates?

How high will the Bank of England take rates?

The Bank of England will probably not raise rates to the same level as in the US, according to the guests on the latest FTAdviser podcast.

Interest rates in the UK recently reached 3 per cent - their highest level since 2008 - as the Bank of England tries to tame inflation.

But Gavyn Davies, chairman at Fulcrum Asset Management and a former chief economist at Goldman Sachs, said most central banks around the world were choosing to allow their currencies to weaken rather than follow the Federal Reserve.

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He said: "The Fed always dominates monetary policy considerations globally. That has certainly been the case in the last two or three years but other central banks have lagged behind the Fed this time. The [European Central Bank] by a distance and also the UK.

"The key here is that although the Fed determines the intellectual climate and the overall cost of capital globally, other countires have floating exchange rates against the dollar so they can choose to follow the Fed to protect their currencies or to allow the dollar to rise against their own currencies.

"Almost all currencies this year have moved down against the dollar. The dollar has been the outlier."

Davies said he was not expecting the Bank of England to "catch" the level at which the Fed will take rates, which he is expecting to be 4.5 per cent.

Ed Smith, chief investment officer at Rathbones, said the UK was the major economy most at risk of inflation remaining "uncomfortably high" because the labour supply remained problematic - for example due to the high number of people off long term sick.

He said: "Thinking slightly further out there is some concern that between 2023 and 2025 the Sunak administration could be too austere.

"If inflation stays too high and fiscal policy stays too austere then monetary policy is constrained to react and you could have a situation where we are fiscally compounding our structurally weak growth outlook for the UK."

Steven Bell, chief economist at Columbia Threadneedle, said labour supply was a "damaging factor" but it could improve.

But he said if inflationary pressures lessened due to unemployment increasing and other factors such as increased migration, this would allow the Bank of England to "look through" the big bulge in inflation.

He said: "Lets not forget, interest rates are coming off exceptionally, extraordinarily low levels. As we come out of a period like that there will always be, as the tide goes out, it will show errors in people's behaviour.

"Who would have thought it was our fuddy duddy final salary pension schemes who would be the big beacon for that?

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david.thorpe@ft.com