UK growth estimate cut to 2.6% but markets pleased

The Office of Budget Responsibility says the UK economy will only grow 2.6% in 2011, well below the 3.25% that former chancellor Alistair Darling had forecast in his final budget.

Sterling soared two cents, or 1.2%, higher against the dollar to $1.4732 on the better than feared outlook. It was 0.31% higher against the euro art €1.2037

Some had been expecting an even lower growth figure and higher debt forecasts than are in the report.

The new public body is chaired by Sir Alan Budd and has been set up by the coalition government to ensure the independence of economic forecasts. it also said inflation will remain above target in the near-term but will be only a tick above target by the end of the year at 2.2%.

This weekend one of the Bank of England's rate-setters said interest rates increases may be needed soon to keep inflation from overshooting target.

As for government debt, the new report predicts public sector net borrowing will be 8.3% of GDP in 2011-12 and public sector net debt will be

The OBR said borrowing will fall from 11.1% of GDP or £156.1 billion in 2009-10 to 3.9% of GDP or £71 billion in 2014-15.

In his last budget, Darling said borrowing would fall to £131 billion next year and £74 billion by 2014/15.

Jonathan Loynes, economist at Capital Economics described the new figures as ‘surprisingly optimistic.’

‘Contrary to expectations that it would project a much higher path for public borrowing than the previous Government predicted, the OBR has actually forecast that borrowing will be a cumulative £22bn lower between 2010 and 2015 than expected in the March Budget,’ he said.

But he said that while that could relieve the pressure on the government to cut, he believes the government will still want to err on the side of caution, if only for political reasons.

In next week's emergency Budget the government will announce its first steps to reduce the government's debt pile.