Downbeat data delivers double-blow on eve of UK budget

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Britain's finance minister George Osborne suffered a double blow on Tuesday, the eve of his annual budget presentation, as data showed inflation hit a 28-month high and state borrowing a monthly record.

Osborne, putting the finishing touches to his 2011/2012 tax and spending plans, is expected to focus on economic recovery in Wednesday's budget, in the face of deep government cuts and tax hikes aimed at slashing Britain's huge deficit.

"February's public finances and consumer prices numbers presented a distinctly unfavourable backdrop to tomorrow's budget," said Capital Economics' chief European economist Jonathan Loynes.

At the same time, some experts fear that Chancellor of the Exchequer Osborne's drastic belt-tightening could tip Britain back into recession, after its economy shrank by a surprise 0.6 percent in the final quarter of 2010.

"Overall, today's figures further emphasise the threats to the UK economy," added Loynes.

"With both public borrowing and inflation so high, the chancellor will no doubt feel the need to stick tightly to his plans for aggressive spending cuts in order to cut the budget deficit and prevent interest rates from rising.

"But there are clear doubts over whether the economy is strong enough to withstand those cuts."

Britain's public sector net borrowing leapt to £11.8 billion (13.6 billion euros, $19.3 billion) in February, striking the highest level on record for that month, the Office for National Statistics (ONS) said on Tuesday.

That easily beat market expectations for £6.9 billion, according to analysts polled by Dow Jones Newswires, and compared with net borrowing of £9.5 billion in February 2010.

The ONS added in a separate release that annual inflation jumped to 4.4 percent in February, the highest level for more than two years and compared with a rate of 4.0 percent in January.

Consumer price index (CPI) inflation was propelled by soaring domestic gas and electricity bills, record prices for diesel and petrol, and rising clothing costs. Analysts had expected a rise to 4.3 percent.

At 4.4 percent -- the highest level since October 2008 -- the annual rate was more than double the Bank of England's official target rate of 2.0 percent.

The pound hit the highest point against the dollar in 14 months as the data increased the prospect of an interest rate hike from the Bank of England, analysts said.

In London trade, sterling jumped to $1.6393 -- reaching a level last seen in January 2010.

The BoE's key lending rate stands at a record-low 0.50 percent -- a level that has stood for two years -- but economists fear that a rate hike could further damage the fragile recovery.

"George Osborne was presented with a twin set of data which he could have done without on the eve of the budget, in the shape of worse than expected figures on both inflation and the public finances," said Investec economist Philip Shaw.

"The policy conclusions are that care continues to be required on the fiscal front, but that we still have misgivings over a near-term interest rate increase."

Annual inflation has risen for five months, driven also by surging world oil prices and a recent hike in government sales taxes.

However, Osborne will draw some comfort from news that annual borrowing remains on course to undershoot the official government forecast.

For the 2010/2011 financial year to date, which runs until the end of this month, total borrowing stands at £123.5 billion. Britain's annual target is for borrowing of £148.5 billion.

© 2011 AFP

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