New Labour Govt Expected To Raise Uk Interest Rates

Britain's new Labour government is likely to hike interest rates in its first big move after sweeping to power in a landslide victory.

Chancellor of the Exchequer Gordon Brown will meet Bank of England governor Eddie George on Wednesday and it is widely predicted that an interest rate hike to cool down the British economy will follow soon afterwards. Says Adam Cole, UK economist at HSBC James Capel: If they do it right away they can blame in on the old Tory government.

Labour leaders say they have inherited an economy which is growing strongly but patchily with pockets of growth.

 

However, this is strongly contested by the Tories who fought elections on the slogan, Britain is Booming.

The Tories say they left behind a vibrant economy marked by low inflation, low interest rates and dropping unemployment.

A post-election interest rate hike was on the cards no matter which party came to power to stop the economy overheating according to economists. Most economists predict it will be in the region of one-quarter of a percentage point, the first hike for more than six months.

Chancellor Brown has the busiest schedule in the new government in the next few weeks. He will immediately start work on a mini-Budget that will be presented in late June or early July.

Brown has the tricky job of sticking to tight spending targets established by the Conservatives at the same time as honouring Labour pledges to improve health and education services.

They have got to meet party expectations but they've said they won't raise taxes on VAT and personal income, said one City economist.

Labour has said there will be no new radical new initiatives on the economic front. It has, however, said it would introduce a windfall tax on the money-spinning privatised water and electricity companies which it says have made excessive profits. Power and water companies shares fell across the board on the Friday in the aftermath of the elections.

The incoming government has also promised that it will abolish value added tax on fuel which has hit pensioners and the poor.

Reassured by Labour's pledge to keep a tight grip on spending, businessmen have responded with uncharacteristic enthusiasm to its return to power. I will stick by the inflation target that we have set down, said Brown before he took over as chancellor of the exchequer.

The Confederation of British Industry (CBI) indicated before the elections that it would welcome a Labour administration after 18 years of Tory rule.

And a number of big name businessman have come over to the Labour camp, including swashbuckling billionaire Richard Branson.

British Prime Minister Tony Blair has gone out of his way to soothe the fears of the business community about a Labour government.

But one ground of dispute is likely to be the minimum wage which got the green light in Labour's manifesto. Businessmen have been lobbying strongly against the minimum wage.

There are mixed opinions about what Labour needs to do in the next few months to keep Britain's economy on course.

Economists say the economy is booming but that growth in the manufacturing sector is poor. This, they say, could spark inflationary pressures because consumer spending is moving faster than output.

Sterling, shares and bonds have given a cautious welcome to Labour's wind but analysts predict a period of market uncertainty until the new government's policy intentions become clear.

Business leaders are concerned that Labour's pledge not to boost personal taxes will make it look to the corporate sector for additional money.

Can you fulfil aspirations without doling out more money, says a City economist.

UK not opposed to Emu, says minister

Britain's new secretary of state for trade and industry said on Saturday that although she was not opposed in principle to a single European currency she would do nothing to damage the country's interests.

Margaret Beckett's comments did not represent a change from official Labour policy but financial markets are watching very closely to see how the new government handles an issue which helped sink the previous Conservative administration.

I'm not in favour of or against a single currency. I have no objection in principle but what I have every objection to is Britain doing anything which is not in Britain's interest, she told Sky television.

Labour, like the outgoing Conservatives, had adopted a wait and see policy over whether to sign up for European Monetary Union and made clear that whatever happened Britain would be very unlikely to sign up for the first stage in 1999.

Labour stuck to this line during the election but over 200 Conservative candidates defied their party leader John Major by issuing campaign leaflets saying they opposed the idea of ever signing up to a single currency.

The Conservatives' deep splits over the issue helped propel Labour into power with a record majority of 179 seats.

Beckett said Labour would work closely with industry but did not give a direct answer when asked whether there would be more state intervention by the new government.