British Current Account Deficit Hits $2 Billion : Pound Takes a Beating on Fears of Rate Increase

Britain turned in its worst monthly trade figures on record Monday, showing that the balance of payments plunged into the red by more than $2 billion in May.

The pound skidded on foreign exchanges. London stock exchange computers had difficulty keeping up with the action, as the market tumbled 36 points before finding the courage to rally a little from the day’s lows.

The current account deficit of 1.21 billion pounds ($2.06 billion U.S.), was almost twice market forecasts.

“They are pretty terrible figures,” said Robert Thomas, a senior economist at investment bankers Greenwell Montagu.

The market now fears that the government will have to raise interest rates--at 9.0% after three increases in the past month--to dampen a consumer spending boom that is siphoning in imports and threatening to accelerate inflation.

Deficit Jumps 66%

“I suspect they are sitting there wondering whether they need to go to 10% or not,” said Ian Harwood, chief economist at the brokerage firm Warburg Securities.

The current account measures imports and exports of goods as well as international payments for such services as banking, shipping and tourism.

The deficit was up by 66% from April’s 728-million pound ($1.24-billion) shortfall. The previous record gap was 905 billion pounds ($1.54 billion) in January.

The Department of Trade and Industry said the May figures were affected by “erratic items”--unusual shipments--and that imports of aircraft and gems were particularly high.

Prime Minister Margaret Thatcher’s Conservative government said the figures were evidence of robust economic growth.

But her left-wing Labor Party opponents say the economic expansion depends too much on credit-driven consumer spending and not enough on manufacturing and exports.

Exports fell by 4.6% to 6.48 billion pounds ($11.05 billion) in May. But imports kept climbing--up 2.1% to 8.19 billion pounds ($13.96 billion).

“It seems to suggest we’re reaching capacity levels, where we can’t keep on meeting both strong domestic demand plus export orders,” said Joanne Curley, an economist at finance house Morgan Grenfell.

Others saw the surge in imports, priced in strong foreign currencies, pushing inflation as high as 5%, higher than a government forecast in March of 4%.

Given the worries about inflation, a rise in interest rates to tame the boom and move the pound higher seemed unavoidable.