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British economy stagnates as growth fall

Thursday, March 21 07:53:57

British finance minister George Osborne turned to the Bank of England on Wednesday to help galvanise a stagnant economy which he said would grow this year at just half the rate previously expected.

In his annual budget speech to parliament, Osborne stuck to his austerity drive in the face of intense calls for a change of course, but said monetary policy could do more to help Britain get out of its rut of near-zero economic growth.

The central bank's inflation target would remain at 2 percent a year, but that was not enough on its own, he said.

"As we've seen over the last five years, low and stable inflation is a necessary but not sufficient condition for prosperity," Osborne said to jeers from the Labour opposition, which wants more spending to help growth.

Osborne said UK economy was now expected to grow 0.6 percent this year, half the rate predicted just three months ago.

"It is taking longer than anyone hoped, but we must hold to the right track" he said.

Britain's meagre growth projection is better than that for the euro zone which is expected by many to contract this year. But it pales against other countries including the United States, which is seen growing closer to 2 percent over the year.

After a slump in opinion polls, Osborne and Conservative Prime Minister David Cameron are hoping for a recovery before they fight for re-election in two years time.

Britain's economy may already be back in a recession again after a contraction in the fourth quarter of last year, while rising inflation is hurting households.

The pound has also been falling. It is down around 7 percent against the dollar and 5.5 percent against the euro this year.

Among the measures announced by Osborne on Wednesday was a 3.5 billion-pound ($5.3 billion) plan to spur new home-building.

Tax changes included cuts in corporation tax to 20 percent in 2015 and on employment taxes for businesses. Individuals will not pay tax on their first 10,000 pounds of income from 2014, a year earlier than expected.

Osborne paved the way for potentially big changes at the Bank of England, asking the central bank's top policymakers to report back to him in August about the merits of setting "intermediate thresholds" for monetary policy.

Such changes might make the Bank of England operate in a way similar to the U.S. Federal Reserve which late last year said it would keep interest rates near zero unless unemployment and inflation reached specific levels.

The response in August by the bank will be one of the first tasks for its next governor, Mark Carney.

Currently head of the Bank of Canada (BoC), Carney spelt out how long the BoC would keep interest rates low, something the Bank of England may do under its new remit.

Carney and the current governor, Mervyn King, both agreed to the new remit, Osborne said.

It also recognised the potential need for further "unconventional monetary policy instruments", such as the massive bond-buying programme already undertaken. Another review of the mandate will be carried out before the end of 2019.

Labour's economics spokesman Ed Balls said it was Osborne who needed a new remit, not the BoE. "It's very marginal, it's tinkering at the edges. It's not a monetary policy problem."

After an initial fall, sterling rose against the dollar. British government bond futures pared losses.

"The change to the remit doesn't go quite as far as some ... had speculated, and therefore the reaction from the currency and gilts has reflected this," said Philip Shaw, an economist with Investec. "It does, however, potentially give the (Bank) more flexibility to ease monetary policy further." ( C) Reuters