Rate rise could mean further recession

Nia Williams

March 1, 2011

This is according to David Coombs, manager of the Rathbone Multi Asset Portfolios, who said that anything above a 100 basis point rise (1%) could damage the economy, and recommends no changes to the base rate this year.

Commenting, he said: “Historically, the Bank of England does not tend to raise rates in March, but there’s chatter that this year might be different.

“Bond markets have priced in a rate rise during the first half of the year, and we acknowledge that the impact of a 25-100 basis point rise is unlikely to have a material impact on growth. However, anything above that could be dangerous. The revised Q4 GDP numbers support our stance.”

Coombs believes that the consumer, who is already under fire from a lack of job security, higher taxes, lower universal benefits, and rising food and petrol prices, could put upward pressure on wages.

“Wage inflation is being seriously underestimated,” he added. “Higher rates will have no effect on inflation, as it is cost-push not demand-pull inflation, so has no impact on non-discretionary items. However, it could increase inflation through wage demands. Many have put up with wage freezes, as they have been better off with cheaper mortgages, but once this starts to change, wage inflation could be back on the agenda.”

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