Interest rates should not have been cut below 3%, says Richard Jeffrey, chief investment officer (CIO) at Cazenove. He argues that the rate cuts have done little to change investors’ perception of risk.
The CIO says the drastic measures taken by the Monetary Policy Committee, which slashed the base rate from 5% in early October to 1%, have only exacerbated people’s concerns about the economy.
“Taking interest rates to ridiculously low levels is not de-risking people’s perceptions,” he says. “The government seems to be trying to force the pain through the cycle, but it cannot turn around a recession. I am not saying they should not have been cut, but I do not think they should have gone below 3%. By doing it this quickly, it is increasing the risk.”
He adds that not enough emphasis has been placed on the “weight of time”, saying that people should be helped to change their perceptions of risk steadily. Quick change should not be forced, argues Jeffrey.
He says, “I am very concerned about how central banks and finance ministers are handling things. The term ‘whatever it takes’ is the most dangerous expression I have heard in the entire period of this downturn. It shows they are not in control and are not sure what to do. There is a huge risk that the fiscal and monetary easing, which is moving towards quantitative easing, could produce quite significant inflation in two to three years’ time.”
Britain’s woes will not halt when markets begin to recover, he adds, and we should expect a slower recovery than those that followed previous downturns.
“As soon as we start to see the financial environment settle down and de-risk, I think equities and corporate bonds will do reasonably well. But once we get into the recovery phase, a big question mark hangs over what will be the strength of that recovery.”
He says that continued de-leveraging will inhibit growth, in particular in the public sector, as the government reduces spending and increases taxation.
Cazenove sees gloom until 2010