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British inflation steady in March

LONDON: British inflation was steady in March, confounding hopes of a fall which would have given scope for rates to be cut again in 1996, data on Thursday showed.

The headline retail price index, Britain's main inflation indicator, was unmoved at a year-on-year rate of 2.7 percent, the Office for National Statistics said.

The underlying index, which strips out volatile home loan payments, was also unmoved at 2.9 percent. Most economists had expected a modest decline in both measures.

"It really doesn't look as if inflation is pushing down towards the government's target," Cooperative Bank economist Andrew Snowball said.

"Together with the stronger real economy numbers we've seen in recent days...I think it's going to be very difficult for the government to push through any further cuts in base rates although there is a political imperative to do so."

The government's medium-term target for underlying inflation is 2.5 percent or lower, but most economists doubt this will be achieved with a pickup in both consumer demand and overall growth likely to add to domestic price pressures.

Most had expected the embattled ruling Conservatives, who are trailing opposition Labour badly opinion polls, to both cut rates again and offer tax cuts in the November budget to regain voter support ahead of the next general election.

This must take place by mid-1997, although many expect the government to be forced to the polls sooner because of Prime Minister John Major's whisker-thin majority in Parliament.

But Thursday's barrage of data also dealt a blow to hopes that British taxes will be trimmed further in fiscal 1997/8 after the modest handouts which took effect this year.

The ONS said Britain's budget deficit reached 32.2 billion pounds ($48.6 billion) in fiscal 1995/6 -- exceeding its official target by 3.0 billion pounds ($4.52 billion). The overshoot in the Public Sector Borrowing Requirement (PSBR) had been widely expected, with revenue from both corporation and Value-Added-Tax far less than forecast.

News that the Bundesbank was lopping half a point off official German interest rates cancelled out the adverse effects which the British data had on domestic financial markets, but most still believe scope for easing in Britain is limited.

Official British rates now stand at six percent, after being trimmed by 1/4 percentage point three times since December 1995.

Chancellor of the Exchequer (finance minister) Kenneth Clarke said on Thursday he remained quite "determined" to set monetary policy with the aim of hitting the inflation target.

After the data, he also insisted the PSBR was still "going firmly downwards" and said he would lower taxes only when the government and the economy could afford it.

"Under normal circumstances this would severely restrict Clarke's ability to cut taxes," David Coleman, economist at CIBC Wood Gundy in London said.

"But a pre-election year can hardly be considered normal and if the Chancellor has any opportunity to reduce taxes again, he is almost certain to take it."

On the inflation side, most of the upward pressure on the 12-month RPI rate came from rising house prices, along with increases in seasonal food and leisure goods costs.-Reuter