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The pound weakened after data showed economic growth in Germany and France exceeded estimates and a report said U.K. living standards will fall, spurring bets that euro-region interest rates will outpace increases in Britain.
German gross domestic product jumped 1.5% in the first quarter compared with the previous three months, and French GDP rose 1%, exceeding economists’ median estimates of 0.9% and 0.6% respectively.
“The U.K. economy looks pretty lackluster compared to the likes of Germany and France, which supports the view that rates are going to rise faster in the euro zone,” said Neil Jones at Mizuho Corporate Bank Ltd.. “That’s going to keep the pound among the laggards of the currency world.”
The Bank of England left its main interest rate at a record low of 0.5% on May 5.
European Central Bank President Jean-Claude Trichet signaled on the same day that policy makers may raise borrowing costs after June, following a decision to keep their main rate at 1.25%.
“There might not be a double-dip recession, but the U.K. economy is certainly facing a period of stagnation,” said Jones. “That’s not going to be helped by raising interest rates. The small size of the anticipated rate increase won’t do much to inflation, which is mainly imported, so it would be better to just keep rates on hold.”
The Confederation of British Industry lowered its economic growth estimates for the U.K. on May 9, saying gross domestic product would expand 1.7% this year compared with a February estimate of 1.8%.
The U.K. economic outlook may worsen further as Prime Minister David Cameron’s coalition government battles a fiscal deficit running at almost 10% of gross domestic product by raising taxes and implementing public spending cuts.
The central bank said this week that inflation may reach 5% later this year, more than double its 2% target, even while risks to economic growth remain “skewed to the downside.” Inflation expectedly slowed to 4% in March from a year earlier, up from 4.4% the previous month, the U.K. office for National Statistics said April 12.
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