Leaviss and Foster clash on interest rates

M&G's bond manager Jim Leaviss has clashed with Artemis' James Foster over whether the MPC should raise interest rates.

Leaviss says the MPC would be wrong to raise rates now, warning it would impact on hard pressed borrowers and the weakened UK economy.

He says until inflation begins feeding into wages, something which it is showing little sign of doing as yet, then there was no need for the MPC to act.

"It would be mad to put up rates right now," he says. "The MPC lacks some credibility right now and it needs to sit on its hands.

"I'm nervous about the way money has been printed, but I only look at wage growth and therefore I'm not worried right now."

Leaviss adds the economy is to fragile to risk a rate rise in the near term.

"We have just barely avoided a great depression so trying to take the medicine too early has too many risks."

However Foster, running the Artemis Strategic Bond fund, says rates need to be lifted as soon as possible to prevent inflation expectations from becoming embedded.

"Mervyn King is starting to lose the plot and he needs to get rates back up again or inflation will become embedded in the system, and then it is much harder to get rid of.

"So the Bank needs to get to grips with inflation now or face a serious inflationary problem in two to three years' time."

While raising rates would hit millions of consumers in the form of higher mortgage repayments, Foster says a small increase now was the right solution to restore the MPC's credibility and prevent the need for more drastic action down the line.

He says: "Some would get hurt by rising rates but the benefit to the currency would be pretty dramatic and would demonstrate inflationary zeal from the MPC."

Foster says an initial rise of around 0.5% - which would take rates back to 1% - would have the desired impact.

CPI figures out this week showed inflation had fallen to 4%, from 4.4% the month before, and Leaviss says the surprise fall has postponed rate hikes.

"Previously I thought it would have to raise in May, but after the inflation figure, that hike has been postponed."

However, Foster says the figure was simply white noise, and he expects inflation to climb to 5% in the next few months.

Both managers agree monetary policy was too loose previously.

Leaviss says from 2001 onwards the MPC's approach was too accommodative, meaning it now lacks credibility and may therefore have to act sooner rather than later and raise rates in order to protect its own reputation.

Foster adds: "If I had been a member of the MPC I would have kept rates much higher in 2006-07."