Sterling pared losses versus the dollar and gilts gained on Wednesday, as chancellor George Osborne modestly revised up forecasts for UK growth and reaffirmed the government’s ‘unwavering commitment’ to cut Britain’s budget deficit.
Osborne said the Office of Budget Responsibility (OBR), the government’s fiscal watchdog, now estimates Britain to grow 0.8% this year, in line with market expectations, up from its forecast of 0.7% last autumn.
Britain will grow 2% next year, down from 2.1% a year earlier, he said, noting that the office’s outlook on the UK economy was broadly unchanged. The OBR also forecast growth of 2.7% in 2014 and 3% in both 2015 and 2016, he said.
Sterling edged down 0.06% versus the dollar to $1.585, up from a day low of $1.582, as the yield – or implied interest rate – on benchmark 10-year government gilts dropped eight basis points to 2.37%.
The FTSE 100 index of blue-chip shares eased 0.01%, or half a point, to 5,892, and the FTSE All Share index added 0.04%, or one point, to 3,061.
Banks edged down after Osborne said the government would raise its bank levy for a fourth time, although the falls were in line with their rivals elsewhere in Europe.
Sainsbury (SBRY.L) was the top gainer on the index, hardening 14p to 319p, on the back of a stronger-than-expected trading statement for the fourth quarter.
Pumps manufacturer Weir Group (WEIR.L) was the biggest loser, sinking 123p to £18.59, in the wake of a profit warning by Baker Hughes, the US oil services group.
On the FTSE 250, housebuilders climbed as Osborne said there would be extra funding to pay for new homes in Britain. Bovis Homes (BVS.L) added 22p to 514p and Barratt Developments (BDEV.L) took on 6p to 149p.
The chancellor, who is battling to maintain Britain's prized triple-A credit rating, added that the deficit is falling and is forecast to reach 7.6% next year, while borrowing in 2011 was set to come in at £126 billion, £1 billion lower than he forecast in the autumn. The government is on track to erase Britain's gaping budget deficit over the next five years, he continued.
Since coming to power in May 2010, the coalition government has embarked on the tightest fiscal squeeze since World War II in a bid to erase by 2017 the bulk of a deficit that is more than 8% of gross domestic product.
'This is of welcome relief to the chancellor and spares him having to tighten overall fiscal policy further. Indeed, the chancellor has indicated that the budget is fiscally neutral over the next five years,' said Howard Archer, chief UK economist at IHS Global Insight.
'Having said that, projected GDP growth of 0.8% in 2012... is still worryingly weak and hardly a matter for celebration. And the very disappointing public finance data for February itself highlights that there are serious risk to the government meeting its fiscal targets.'
The losses in sterling came after official data showed earlier that Britain’s Budget deficit hit a record high for the month in February, as spending rose and income tax receipts slumped.
According to the Office for National Statistics, public sector net borrowing, excluding public sector interventions, surged to £15.2 billion last month – up from £8.875 a year earlier, and far higher than the average forecast of £5.2 billion in a Reuters poll.
Also on Wednesday, two members of the Bank of England’s Monetary Policy Committee voted to boost the size of the central bank’s asset purchase programme, known as quantitative easing, or QE, by a further £25 billion.