Shant: Sluggish policy response may have pushed Europe into a dead end

Newton manager believes tightening policy now could be detrimental to growth.

Newton’s Rajesh Shant has warned the eurozone recovery has been hampered by “failing” monetary policies as new data on growth disappoints.

The manager of the group’s £260m Continental European fund, and head of European equities at the group, said fresh data on slowing growth will threaten the ECB’s planned rate hikes as the economy may be unable to cope with tightening measures.

“Interest rates have been kept too low for too long and, at this stage, the economy may not be able to bear hikes,” he said.

Shant believes ECB President Jean-Claude Trichet may still opt for a further hike to 1.5% in July, but more aggressive hikes will be left up to his successor, Mario Draghi.

“The eurozone composite PMI, a major indicator of economic activity, dropped sharply from 57.8% in April to 55.4% in May, suggesting growth is also picking up in strong countries such as Germany and France.

“We will have to wait until the last quarter to see if this is the beginning of a more pronounced slowdown in growth,” he said.

“I am generally sceptical on Western monetary policies. They look absolutely right if you believe the credit crunch was caused by a lack of cheap money and a lack of speculation,” he said.

“But if you believe the contrary, these policies are set to replicate the same problems because rates are deliberately set below the level of inflation.”

The ECB hiked rates for the first time in nearly three years in April, raising them to 1.25%.

Further increases appear to have been put on hold after inflation data showed a surprise drop to 2.7% in May, from 2.8% in April, but Shant said the incoming ECB President may be more aggressive than expected.