UK - Scottish Widows Investment Partnership has dismissed fears that a rise in inflation rates will have a huge impact on institutional investors.
The firm says an increase has already been factored into markets and rates are so low that they are unlikely to spiral out of control.
Higher inflation is expected as a result of increased interest rates around the globe – a far cry from a year ago when the markets were in the midst of global deflation.
But SWIP chief economist Richard Dingwall Smith said there was little cause for concern.
“In our view, global inflation will accelerate only moderately and this prospect is substantially reflected in current market levels.
“Bond yields have already adjusted upwards in anticipation of higher short-term interest rates, particularly in the US. In turn, firmer bond yields have held back equity markets during the first half of 2004, offsetting the favourable impact of rising corporate profits.”
Dingwall Smith added that fears held by the Monetary Policy Committee that inflation would rise above 2% seemed “overdone” and he did not expect to see base rates go up beyond 5.25% by early next year.
He said: “A softer housing market and a slowing of overall economic growth will eventually allow the M% to take a more relaxed view of future inflation.
“Inflation in the UK is still very low. Even with a sharp jump in petrol prices, the annual increase in the consumer price index was only 1.5% in May, still comfortably below the government’s 2% target.”
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