GMP Independent Financial Advisors LLP

Thu, 17 Feb 2011 14:16:50 GMT

M&G head of retail fixed interest Jim Leaviss says Bank of England policymakers risk putting Britain into the same situation Japan faced in the mid-1990s if they start to hike interest rates.

Speaking at the Fund Strategy Investment Summit in Kitzbühel, Leaviss highlighted the fact that in the mid-1990s Japan saw a number of robust quarters of growth only for its government to hike consumption tax in 1997.



He said: “Japan hiked consumption tax in the same way the UK hiked VAT from 17.5 per cent to 20 per cent and for Japan it had an immediate affect on economic growth, by comparison the UK had a poor fourth quarter of growth in 2010 in anticipation of the VAT rise and the austerity coming. Japan was back in outline outright deflation within a year or so and had a quarter of GDP growth that was down almost 2 per cent in 1998.
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Leaviss said Bank of England historical policy errors mean it has lost its credibility to avoid hiking rates this year. Leaviss expects a rate rise to come in about June, which he said would be exceptionally bad news for the British economy.

He said: “I think the BoE is in a terrible position having made policy errors historically by keeping rates too low in 2005, as this was a time when we had very strong domestic inflation but we had massive imported goods price deflation. This was when China was exporting cheap goods and the bank didn’t do anything because it thought we had deflation from import prices that outweigh the inflation we were seeing at home.

“We are now in the opposite position where we have imported goods inflation and domestic weakness, so the BoE wants to remain symmetrical about what it does, meaning it should be hiking interest rates now, but really it should have been hiking interest rates back then and we would have avoided the housing bubble and some of the credit crisis.”

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