Unclear majority in UK Parliament pushing difficulties to manage budget deficit

Thursday, April 22, 2010

Yesterday the pound rose against both the euro and the US dollar as UK claimant counts fell more than economists forecast in March, giving a boost to Prime Minister Gordon Brown as he fights the tightest UK general election for more than 30 years. The currency gained 0.31% against the US dollar to close at GBP 1.54081 in the forex online market. It rose by 0.66% against the euro to close at GBP 0.86861.

The number of people collecting jobless benefits fell 32,900 from February to 1.54 million, the Office for National Statistics said yesterday. A drop of 10,000 had been expected. In February, the number of jobless claims fell by 40,100 instead of the 32,300 drop originally reported. The decline was the largest since June 1997. In March, the claimant count rate fell to 4.8%, the lowest since June last year, from 4.9%.

A separate measure of unemployment climbed to a 16-year high. The 8% unemployment rate, up from 7.8% in the previous period, compares with 9.7% in the US and 10% in the 16-nation euro zone.

Polls published Tuesday showed Labour slipping into third place after a surge in support for the Liberal Democrats following the first debate on April 15th. The results mean Labour could win the most seats in Parliament and remain in power with the support of the Liberal Democrats.
Sterling has been weakened by market speculation that the general election may produce no clear majority in Parliament. A minority government would have difficulty pushing through measures to tackle the budget deficit, which currently rivals that of Greece, at almost 12% of GDP.

The report may fuel speculation that the Bank of England will have to raise interest rates at a faster pace than previously thought as inflation climbed to 3.4% last month. Some central bank officials showed concern at the prospect of a prolonged bout of faster inflation when they met earlier this month, according to the minutes of their meeting published yesterday. The central bank has kept its interest rate at 0.5% since March 2009 to bolster growth.

U.K. annual consumer-price growth accelerated to 3.4% last month, according to data released on Tuesday, pushing close to the 14-month high of 3.5% reached in January. The Bank of England has a mandate to target inflation at 2% and keep it within 1 percentage point of that goal.

Bank of England officials, who are trying to balance fostering the economic recovery and the threat of accelerating inflation, have suspended comment on policy before the May 6th general election as Prime Minister Gordon Brown tries to win over voters on his record of managing the economy.

In Europe yesterday the Greek government's cost of borrowing hit a new high as talks on the rescue plan began. The interest rate on 10-year government bonds hit 8.3% - the highest level since the euro was introduced. Rates rose as it became clear that talks over the aid package may not be finished until days before a multi-billion-euro loan is due for repayment.

Many observers now feel it will be a question of when not if, Greece needs the aid.
Greece's finance ministry said the talks with the European Commission and the IMF would take about two weeks, with a joint text expected to be issued on around May 15th. On May 19th, Greece is due to repay investors an 8.5 billion euro bond.

In a statement on Tuesday, Greece's finance ministry, said: "The discussions concern a three-year program of economic policies... which can be supported with financial assistance from euro zone members and the IMF should Greek authorities decide to request the activation of the mechanism."

The talks, will discuss the precise terms, conditions, and interest rates that would apply if Greece asks for the aid. If all sides can agree to the terms required it should clear the way to a quick payout of up to 45 billion euro on offer from the EU and IMF.

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