2011 predictions: interest rates around the world

3. Britain: Belt-tightening is coming

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    Students march through Birmingham, England, in protest at the increase in student fees Dec. 8, 2010. Students are furious over the coalition government's decision to allow schools to triple the cap imposed on tuition fees, allowing the best universities to charge up to 9,000 pounds ($14,000) per year in a bid to reduce the burden on Britain's debt-laden public sector. British students currently pay up to 3,000 pounds ($4,675). As budget cuts slow growth, pressures to raise interest rates should ease.
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Most of the points already noted for the Eurozone apply to Britain (except, of course, Britain does not have Germany to help pay the bills and has its own currency).

The new Conservative-Liberal Democrat coalition government plans to slash 83 billion pounds ($130.6 billion) from the country’s operating budget over the next few years. This will reduce the currency deficit from 10 percent of GDP to just over 2 percent.

While clearly necessary, spending cuts of this magnitude will almost certainly result in an overall slowing of the economy. Unemployment will also increase as the government pares the number of workers on the public payroll and eliminates funding for public works projects.

For the past three quarters, inflation in England has been rising faster than the Bank of England’s 2 percent target rate. However, as the impact of the spending cuts gathers steam, growth will likely decline – negating the need to raise interest rates.

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