Britain has reason for economic optimism - Osborne

LONDON Fri Jan 13, 2012 7:03am GMT

Chancellor of the Exchequer George Osborne leaves Downing Street in central London December 14, 2011. REUTERS/Toby Melville

Chancellor of the Exchequer George Osborne leaves Downing Street in central London December 14, 2011.

Credit: Reuters/Toby Melville

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LONDON (Reuters) - Britain can be confident about its economic outlook this year, with inflation falling, interest rates low and plans in place to deal with a record budget deficit, Chancellor George Osborne said on Thursday.

The sovereign debt crisis in the neighbouring euro zone remained a serious threat to the economy, but Osborne said in an interview with ITV News he thought the single currency would survive.

Osborne's cautious optimism came as the National Institute of Economic and Social Research, a leading think tank, said British growth had slowed to just 0.1 percent in the last three months of 2011.

The Bank of England on Thursday kept interest rates at a record low of 0.5 percent, where they have been for nearly three years.

Britain is teetering on the edge of recession as global growth slows, government spending cuts bite, and all-important consumers struggle with high inflation, tax hikes and slow wage rises.

Osborne said there were "signs" the economy was turning a corner and there were reasons to be optimistic in a year when Britain will host the Olympic Games in London.

The low interest rates on British sovereign debt, a result of international markets' approval of the government's deficit-cutting programme, were a "huge boost" to the economy, he said.

"Borrowing is coming down. The job is being done as we talk. Jobs are being created in the private sector," Osborne said.

"We've been taking the right decisions. ... they've laid the foundations for growth, job growth, confidence in Britain in this important year where we host the Olympics. There are reasons to be optimistic," he added.

Consumer price inflation fell to 4.8 percent in November, and the Bank of England has forecast that weak economic growth will push inflation below its 2 percent target by the end of 2012.

"One thing you will see this year is a fall in prices, in the rate of inflation," Osborne said.

He called the current period "challenging" but said that with the hoped-for decline in inflation, "there are some things going right as well, overall you can look to the future with a lot of confidence."

Osborne said he thought the euro would survive the sovereign debt crisis in the neighbouring euro zone, a major export market for the UK, but reiterated the effect on Britain.

"There is a lot of commitment to making the euro work. But there is no doubt that Europe needs to do more to help its economies grow and take some of the decisions that actually we've taken here in Britain to deal with our debts," he said.

"Ultimately, this year of course, what happens in the euro zone is important ... if the European continent is facing problems - that has an impact here in Britain," he added.

Osborne said he wanted to see bonuses fall at the nationalised Royal Bank of Scotland (RBS.L), which announced 4,450 job losses on Thursday in a cutback of its investment banking operations.

"I'm going to use my power as the shareholder to do what's necessary, to make sure that bonuses at RBS's investment bank are much lower than they were last year," he said.

High pay for bankers has become a hot political issue after the 2007-8 financial crisis that saw Britain bail out and nationalise leading banks and suffer a steep recession.

Britain owns 83 percent of RBS, Britain's fifth biggest bank after pumping in 46 billion pounds to keep it from going under.

(Reporting by Tim Castle; Editing by Leslie Adler)

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