Fidelity's Spreadbury warns BoE rate cut could be a mistake

Speaking ahead of Bank of England meeting today

Laura Dew
Fidelity's Spreadbury warns BoE rate cut could be a mistake

The Bank of England would be making the wrong decision in cutting interest rates this month, according to Fidelity International bond manager Ian Spreadbury.

Spreadbury (pictured), manager of the £3.5bn Fidelity Moneybuilder Income and £1.6bn Strategic Bond fund, said the only reason for the Bank of England to cut rates would be to increase borrowing, help GDP and to bring the currency down, as he argued the UK should be allowed to fall into recession.

The Bank of England is to meet today to make its monthly interest rate decision. It has held rates at 0.5% since 2009 and was widely expected to follow the US Federal Reserve in hiking rates this year, until the shock outcome of the EU referendum when the UK voted to 'leave'. 

Since then, Mark Carney, governor of the Bank, has hinted it will take action to boost liquidity with monetary policy easing this summer leading to speculation a rate cut could be as early as the July meeting.

Fidelity's Spreadbury, however, said it would be the wrong thing to do: "The problem I have got with encouraging people to borrow when global debt to GDP is already at an all-time high is I do not think they are going to get much traction.

"I think people are already indebted. If someone is coming up to retirement in the next  five to 10 years, with interest rates having come down to such a low level, they are going to need a much bigger capital amount to provide the same income. The logical thing people will do will be to save more because yields have come down. In some ways, low interest rates encourage people to save, so it is almost having the opposite effect."

Could UK see negative rates within the year following Brexit?

He added the Bank was trying too hard and, rather than manipulating the system with quantitative easing to avert a recession, it might be better to allow the country to fall into recession.

"I think a better option would be to use the fiscal side more. It is a tough spot and, ultimately, it may be that we have to go into recession. That is the way the capital system works, you have good times and you have bad times. It seems like trying to avoid a recession at all costs is not the right thing to do."

His colleague Dominic Rossi, global chief investment officer for equities, has already warned the UK could fall into a mild recession by Christmas

Meanwhile, Spreadbury, who has worked for Fidelity since 1995, also said it was unlikely for corporate bond funds to be affected the same way as property funds have been. Several large property funds have been suspended due to the combination of illiquidity and high volume of outflows.

"Liquidity is declining and that is an issue but the Moneybuilder Income fund has a liquidity buffer of 20% from cash and government bonds which means we would not have to be a forced seller. 

"It would be careless of corporate bond managers not to have a suitable liquidity buffer in this environment."

The Fidelity Moneybuilder Income fund has returned 9.4% over one year to 12 June according to FE versus an IA Sterling Corporate Bond sector average of 8.4%.

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