Central bankers around the world have created the “mother of all asset bubbles” which is preventing them from tackling inflation by raising interest rates, according to Kames Capital’s David Roberts.
Roberts, head of fixed income at Kames and manager of portfolios including the Kames Strategic Global Bond fund, said much of the rhetoric from central bankers – including Governor Mark Carney at the Bank of England (BoE) – has been increasingly contradictory of late as inflation continues to climb above target.
He said this is a sign that central bankers are running out of excuses around inflation, with the real reason for their inaction the huge bubbles in investment markets that loose monetary policy has created.
“Central bankers globally have expanded their balance sheets to nearly $18trn in the past decade, a sum greater than US GDP,” he says.
“They have created the mother of all asset bubbles across most financial asset classes and that, coupled with the ongoing need to fund ever-larger government deficits, means they seek any excuse to keep rates as low as possible for as long as possible.”
He said this scenario is leading to mixed messages from central bankers, including the BoE’s Monetary Policy Committee.
“Apparently, the main reason for not raising rates in the UK recently was because consumers would face a squeeze this year from the impact of higher inflation, all of which was attributed to a weaker sterling,” Roberts says.
“However, if Carney really worried about the squeeze on household income, firstly in part this is a situation he created and secondly, he could help reverse it by raising interest rates. Of secondary concern to the Bank is consumer indebtedness. Again, a modest rate increase now can act as a brake on borrowing and curb the worst of bubble mentality excess.”
Back in 1997, the era of independence was ushered in alongside the landslide election victory for the Labour party. Fast forward 20 years and Roberts notes May 2017 does not look too dissimilar, with local elections ahead of a general election, and a continued debate on central bank independence.
Nonetheless, he said there had been a number of positives to come out of central bank independence over the past two decades.
“If there is a big tick on the Bank’s scorecard it is the transparency and clarity of its monetary process. Interest rate policy has moved on leaps and bounds over the past 25 years from electoral expedient to a clear, transparent process, with accountable MPC members,” he says.
Nonetheless, Roberts added a lot of issues from the crisis era were now rearing up again.
“Brexit and record low interest rates have now sparked renewed concerns about consumer indebtedness and a return to record house prices, and the Bank, along with most central banks, now admits to being worried at the level of consumer debt. The last time we heard that was 2008, and we all know how that ended.”