Britain defends economic policy after Fitch warning



AFP

Published — Thursday 6 December 2012

Last update 7 December 2012 8:52 am

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LONDON: British finance minister George Osborne defended his handling of the economy after Fitch warned that his latest austerity budget had sparked questions over the nation's top AAA credit rating.
Chancellor of the Exchequer Osborne said in his budget update on Wednesday that the government would fail to meet its official target for reducing public debt as a proportion of economic output by 2015-16.
And the British people would now suffer austerity until 2018 — three years later than initially planned — as a result of gloomy downgrades to official economic growth forecasts from the Office for Budget Responsibility (OBR) fiscal watchdog.
With Britain having recently exited recession, the Bank of England on Thursday froze its record-low interest rate at 0.50 percent.
The central bank also maintained its quantitative easing (QE) stimulus policy, one day after the OBR cut its growth forecasts for every year until 2017 and predicted a 0.1-percent contraction for 2012.
Fitch warned on Wednesday that the failure to meet the debt reduction target damaged the "credibility" of Britain's cherished AAA rating.
Questioned about the potential loss of the top credit assessment, Osborne told the BBC: "It wouldn't be a good thing, but the credit rating is one of a number of ways which people look at countries.
"Another test which is how much will people pay to borrow money and how much people are being paid to borrow money, what is the interest rate that the country needs to charge to get people lending money."
The chancellor said Britain was still regarded as a good place to invest in the bond market.
"We are borrowing money at the moment at some of the lowest interest rates in British history because when people look around the world, look at the countries to invest in, they think Britain is a good investment," he added.
"The credit rating is important and the market is important. One of thing we've been able to do with this the government is keep (bond) rates very very low, because the world has confidence in us."
Fitch, which placed Britain's AAA rating on negative outlook in March, said it would conduct a formal review of the rating in 2013 after the next annual budget due in March.
And the agency noted that Wednesday's budget update showed "the scale of the multi-year fiscal consolidation challenge facing the UK."
Fitch added in a statement: "The government has chosen not to chase the (debt reduction) target by deploying additional consolidation measures over the next two years.
"In our view, missing the target weakens the credibility of the UK's fiscal framework, which is one of the factors supporting the rating.
Fitch added that it expected that by 2015-2016 debt would be "approaching the upper limit of the level consistent with the UK retaining its 'AAA' status".
Britain's Conservative-Liberal Democrat coalition government, which rose to power in 2010, has since sought to slash a record deficit inherited from the previous Labour government.
Osborne added on Thursday: "Two years ago when this government came into office, there was an imminent danger that Britain was not only to lose its credit rating but loose all credibility in the world's markets.
"We had the same (bond) interest rates as Spain at the end of the last Labour government. Things have changed a lot with this government -- we've got those interest rates down."
The Bank of England's key interest rate has stood at 0.50 percent since March 2009, when it began pumping billions of pounds into the flagging economy under its radical QE cash stimulus policy.
The central bank has so far injected £375 billion ($604 billion, 462 billion euros) under QE, whereby it creates cash to purchase assets such as government and corporate bonds, with the overall aim of boosting economic activity.
Thursday's interest rate call was the first since Osborne appointed Canadian central bank chief Mark Carney last month to head the Bank of England. Carney will take over from current BoE governor Mervyn King at the start of July.

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