A hike in the base rate of as little as 0.25% would have a much greater impact on the disposable incomes of highly indebted consumers, potentially threatening the UK's recovery, Neil Woodford has said.
The renowned investment fund manager, who expects rates will rise much later than markets are currently estimating, said given the Bank of England now has a dual mandate to promote financial stability, a hike now seems unlikely.
Woodford, responding to what had been a growing expectation of a hike this year before Bank governor Mark Carney's latest speech, said: "The market is wrong to expect an imminent tightening of monetary policy. It would be a mistake if interest rates were to rise."
Carney's most recent move has been to cool expectations of an imminent rate hike, in a u-turn on previous comments made in February.
Woodford said the Governor had got himself "in a bit of a pickle" with his policy of forward guidance, something Carney tacitly acknowledged himself in his Mansion House speech this month when he noted the ultimate decision on the timing of any hike will be "data-driven".
So what does Woodford think a rate hike now would do to consumers still struggling with a substantial debt burden?
"Increasing interest rates and, in turn, mortgage rates, reduces household disposable income," Woodford said.
"Darren Winder, a highly respected economist at the Lazarus Partnership, recently suggested that each 0.25% increase in the average mortgage rate would decrease the average household's disposable income by about 1.25%. Such a policy move would potentially be very destabilising for the UK economy."
As a result, Woodford is sticking to his view that rate rises could still be much further off than expected, while conceding no one - including Carney - knows when rates will actually rise.
"I think it is highly unlikely it would endanger the UK's fragile economic recovery by increasing interest rates any time soon," he said.
