Bill Mott, manager of the PSigma Income Fund, believes a benign labour market, increased unemployment, falling house prices and reduced public spending are deflationary factors for the economy.

He believes the only external factors influencing the economy’s inflation are rising food, energy and commodity prices.

Mott says, ‘At present, in developed nations, there are virtually no inflationary pressures from internal sources.

‘Quite frankly, it doesn’t matter whether UK interest rates are 5.75 per cent or 3.75 per cent; they will have no effect on the drivers of inflation.’

If the Bank of England doesn’t cut interest rates aggressively enough, it is allowing money markets to dictate interest rate policy, argues Mott.

‘In our opinion, the outlook for world markets is totally dependent on the actions of central banks and whether they correctly judge the appropriate monetary response to the current situation,’ he adds.

On the US front, PSigma forecasts significant interest rate cuts in 2008 to avoid a recession and allow growth to pick up.

Mott says, ‘The current economic situation warrants significant rate cuts in the UK and elsewhere.

‘Central banks will become increasingly aware of the necessity to cut interest rates in the next couple of months and they will move aggressively to do so. If they do not, then the outlook for markets will be bleak.’