If the Bank of England votes in favour of a rate rise before the close of the year it will be a policy mistake, with the economy not strong enough to sustain such a move, according to Andrew Belshaw, head of investment management at Legg Mason subsidiary Western Asset.
The UK’s base rate has been at a record low of 0.25% since August 2016, having previously been held at 0.5% following drastic action from the Bank of England in the wake of the global financial crisis.
The most recent vote saw the Bank of England split 7-2 in favour of keeping rates on hold. Nonetheless, there has been mounting speculation that rates will rise before the end of the year, with a recent miscalculation by the Office for National Statistics (ONS) adding fuel to the fire after it admitted earlier this month that real labour costs were much higher than expected.
Despite this Belshaw, while speaking at a conference recently in London, said a decision by the Bank of England to raise rates would be misplaced.
“It will be a policy mistake if the Bank hikes rates,” Belshaw said. “Net exports are weak, GDP growth has already peaked and is likely to fall, real average earnings are negative, and there are no inflationary pressures.”
Belshaw said that rather than embark upon tightening monetary policy, the UK should see economic hurdles created by Brexit as an opportunity to rebalance sources of growth from the economy and create a footprint for sustainable expansion.
“We now have a great opportunity to rebalance away from consumption and towards exports,” he said.
“We need politicians to make it attractive to invest in the UK by cutting corporate taxes, and utilising Brexit – and sterling’s depreciation – to rebalance the wider economy to get the percentage of GDP which comes from domestic consumption, currently above 70%, down sharply and get exports taking up more of the strain.”