Woolnough on the risk of an inflation spiral in the UK

WHY UK HAS REAL RATE PROBLEM

Richard Woolnough, manager of the M&G Corporate Bond, Strategic Corporate Bond and Optimal Income funds, discusses the ultra-low interest rate policy in the UK:

The financial crisis is resulting in the authorities, the public, and investment managers seeing things they did not expect to see. Yesterday's headline RPI level of 5.5% is a record 5% above the Bank of England base rate of 0.5%, resulting in a negative real interest rate (base rate - RPI) of -5%. This is the most divergent I've seen in my 25 years in the city. The bond bears think that the relationship will be normalised by a rapid increase in the base rate and a fall in inflation towards more normal levels. The bulls would suggest that the inflation measure reflects temporary fa...