RBC BlueBay Asset Management LLP is betting the Bank of England won’t raise interest rates as much as anticipated for fear of triggering a crash in the housing market.
(Bloomberg) — RBC BlueBay Asset Management LLP is betting the Bank of England won’t raise interest rates as much as anticipated for fear of triggering a crash in the housing market.
The firm is positioning for the bank rate to end the year at 5.75%, rather than 6.25% priced by money market traders, Mark Dowding, chief investment officer and manager of $111 billion in assets for BlueBay in London, said in an interview on Tuesday.
“If you go too hard you’ll crater the housing market and you’ll end up with a financial crisis in the UK and stagflation,” he said. “You have to accept that it’s going to take a bit longer to bring inflation down.”
BlueBay bought three-month Sonia contracts in recent weeks to bet on less aggressive tightening. Money markets in contrast expect policymakers to raise rates further, stoking concern that higher mortgage payments will squeeze the finances of millions of borrowers.
BlueBay’s Sonia position is at a third of its potential capacity, and the firm will add to this if more evidence emerges that inflation is coming down, Dowding said. J Sainsbury Plc reported higher sales on Tuesday and said that food inflation is starting to fall, suggesting that the cost-of-living crisis could start to ease.
For now though, the market remains skeptical. Inflation remained higher than expected for a fourth month in May, spurring a sharp repricing in the interest-rate outlook. The BOE raised its key rate for a 13th time in June to 5% and pricing implies almost one-and-a-half points of further increases are in store.
The BOE made a “massive mistake” in raising rates too slowly at the start of the hiking cycle and risks compounding this error if it continues to accelerate policy tightening now, Dowding said. Earlier rates rises are about to make their effect felt, he added.
“It’s like the fool in the shower,” he said, using a term attributed to American economist and Nobel laureate Milton Friedman. “You get in the shower, the hot water is not coming through so you turn it up and just when you jump in its scolding hot.”’
Abrdn Investments Ltd. is also positioned for less tightening than anticipated after receiving two-year Sonia swaps in recent weeks, Investment Director James Athey said. “To accelerate their hawkishness this late into the cycle just as the mortgage cliff really kicks in would simply be compounding one error with another,” he said of the BOE.
(Adds context on inflation and interest rates in sixth paragraph, comment from Abrdn in final paragraph.)
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