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Delayed rate hike could spark 1970s-style inflationary shock

by: Anna Fedorova
  • 10/09/2014
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Delayed rate hike could spark 1970s-style inflationary shock
Kames Capital’s David Roberts has warned delaying an interest rate hike any longer could cause the kind of inflationary shock last seen in the UK more than thirty years ago.

The head of fixed income (pictured) said rates should be raised sooner rather than later, and warned central bank complacency could lead to inflationary shocks and market bubbles.

“Raising rates right now is a sensible thing to do,” he said. “The market is becoming too complacent again in that respect, but not doing anything is a material risk to the economy.”

The increasing probability of a ‘yes’ vote in the Scottish referendum next week has weakened sterling, which could prompt further inflationary pressure within an economy that is already recovering healthily, Roberts argued.

“The central bank should not be taking risks with the economy,” he said. “Delaying a rate rise now as both Scottish and UK economies approach full capacity […] could create an inflationary shock not seen since the 1970s.”

In the early 1970s, the Bank of England delayed tightening monetary policy despite above trend economic growth. Then, as inflationary pressures were exacerbated by oil price spikes, inflation jumped above 20% by 1973.

Roberts also drew parallels to the 1920s, when the Federal Reserve chose to cut rates despite equity markets being at all-time highs. This led to elevated inflation rates and, ultimately, the Wall Street Crash of 1929.

Turning back to the present day, Roberts said the Bank of England should be acting to evade known dangers, rather than trying to avoid the unpredictable impact of the Scottish referendum vote. He added, however, the the timing was ripe for a rate hike with or without concerns over Scotland.

“Anyone saying the timing of rate rises does not matter is talking nonsense – this is how market bubbles and volatility are created,” he cautioned.

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