Magazine article Financial Management (UK)

Sound as the Pound: Firm Foundations Are in Place for Economic Recovery in the UK and Forecasters Are Lifting Their Sights for 2004, despite Interest Rate Increases. but, as David Ross Reports, It's Not So Rosy in the Eurozone

Magazine article Financial Management (UK)

Sound as the Pound: Firm Foundations Are in Place for Economic Recovery in the UK and Forecasters Are Lifting Their Sights for 2004, despite Interest Rate Increases. but, as David Ross Reports, It's Not So Rosy in the Eurozone

Article excerpt

The Bank of England's monetary policy committee (MPC) raised UK interest rates from 3.75 per cent to 4 per cent at its meeting in February. The increase, which was the second in three months, was deemed necessary for two reasons. First, it was imposed to quell exuberance among consumers, who have amassed unprecedented levels of debt in the past two years. (The Financial Services Authority says that one in five households is already having trouble with debt repayments, despite historically low interest rates.) Second, it was intended to cheek house price inflation, which has been running at between 15 and 25 per cent over the same period.

The rise came despite the fact that the rate of inflation has been below 2 per cent. The MPC clearly believes that inflation will rise above target within the next two years if it does not take decisive action now. Because the UK economy rode the recent downturn better than its US and European counterparts, it has comparatively less spare capacity. This explains why the MPC has already raised rates twice this cycle (see graph) while the US Federal Reserve and the European Central Bank (ECB) have kept them unchanged.

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The UK economy is certainly on the up: quarterly GDP growth in the fourth quarter of 2003 is provisionally estimated to have been 0.9 per cent--the best performance since the first quarter of 2000. The latest business trends report from accountants BDO Stoy Hayward points to rising business confidence. At 100.9, its optimism index is at its highest level since 2000. Confidence among Britain's manufacturers is at its highest since April 2002, according to the CBI's latest industrial trends survey. And, despite sterling's recent sharp rise against the dollar (see graph), optimism about exports has also improved.

Forecasters, who a few months ago dismissed the chancellor's prediction for growth this year of 3 to 3. …

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