Paying to lend money to the UK

The government has just sold £700m of bonds - but investors have paid the government for the privilege, once inflation is taken into the maths. It's been estimated that after the inflationary effect, the effective interest rate will be -0.116% on the 35-year notes.

It's quite an unusual move, and a sign that investors increasingly perceive the UK as a safe haven.

Balance needed

Perhaps, yet the pound remains significantly weaker than it was several years ago pre-crisis, despite sterling being now close to a 16-month high against the euro. Sterling investors will be watching for the Bank of England rate judgement on Thursday; it looks likely that the Bank of England will hold base rates at 0.5% and continue the quantitative easing at £275bn.

It's a tricky balance. On one side, the weakened pound in the last year has helped exports, but it has been a difficult situation for consumers also having to manage wage freezes, increased job insecurity and rising inflation costs. Foreign holidays have become much more expensive for some.

Imports up

Despite a weakened sterling, the Office for National Statistics (ONS) says the UK's trade deficit has now widened £0.7bn to £8.6bn; exports to non-EU countries have slipped and imports from non-EU countries, particularly raw materials, have climbed to a new high.

The upshot is that despite the increased confidence of overseas investors, the UK economy is still struggling to gain traction, not helped by eurozone woes. A recent Markit Purchasing Managers survey also claims British manufacturers' export orders in the last quarter expanded at their slowest rate since late 2009.
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