Jan. 6 (Bloomberg) -- Prime Minister David Cameron predicted a difficult year for the U.K. economy that will require maintaining the current mix of low interest rates and budget-deficit reduction.
“It’s a tough economic environment that we’re in,” Cameron said on BBC Television’s “Andrew Marr Show.” “Right now, Britain needs low interest rates.”
Cameron indicated in a Sunday Telegraph interview that he would like to stay in office another seven years, even as an opinion poll suggested his Conservative Party will lose power in 2015. To keep borrowing costs down, the coalition government must sustain a “credible strategy” for controlling the budget deficit, he said today. “That’s the absolute key.”
Convincing global investors that they should keep buying U.K. bonds is ultimately more important than whether ratings companies downgrade gilts, he said. Standard & Poor’s last month lowered its outlook on Britain’s top credit rating to negative, citing weak economic growth and a worsening debt profile.
“The real test is what are the interest rates the rest of the world is demanding in order to own your debt,” Cameron said. “And our interest rates are extremely low, the lowest they’ve been really for centuries.”
Bank of England policy makers next week will keep the benchmark interest rate at 0.5 percent and the quantitative-easing target at 375 billion pounds ($603 billion), according to economists surveyed by Bloomberg News.
U.K. credit conditions eased in the fourth quarter and spreads on mortgage rates declined because of the so-called Funding for Lending Scheme that began in August, according to a Bank of England report last week. Still, services unexpectedly slumped in December, raising the risk of an economic contraction, and economists at Citigroup Inc. forecast more QE in 2013.
The yield on 10-year U.K. government bonds rose the most in four years last week, rising above 2 percent for the first time since May 10, as the U.S. budget deal curbed demand for the safest assets.
Official rates will depend on the Bank of England, which is independent, said Cameron. The prime minister praised the performance of outgoing Governor Mervyn King and said that Mark Carney, who will take over in July, is the “world’s leading candidate as a central bank governor,” he said.
The economy is on the “right track,” with declining unemployment, and there are strong signs it is rebalancing toward growth drivers such as manufacturing, the prime minister said.
An opinion poll published in the Daily Mail today showed the opposition Labour Party with 38 percent support, the Conservatives at 29 percent and Liberal Democrats at 11 percent. The pollster Survation, which questioned 1,002 people on Jan. 3 and Jan. 4, said 16 percent expressed support for the U.K. Independence Party.
Such a result in the 2015 election would disrupt Cameron’s plans to stay in the job until 2020.
“I want to fight the next election, win the next election and serve,” he said in an interview with the Telegraph.
The government this week will publish a document setting out the mid-term aims of the Conservatives’ coalition with Nick Clegg’s Liberal Democrats. “Far from running out of ideas, we’ve got a packed agenda,” Cameron said.
The two parties have clashed over issues such as welfare reform and changes to the House of Lords.
The prime minister also delivers a speech this month on his vision for the U.K.’s role in Europe as he comes under pressure from lawmakers in his party who want to pull out of the European Union. He told the BBC that advisers were studying areas in which the U.K. may seek to revise agreements with fellow European governments, declining to provide details.
“We want to be members of the European Union, particularly the single market, but there are changes we’d like to make,” he said.
Cameron also said the U.K. military is prepared to defend the Falkland Islands if necessary, after Argentine President Cristina Fernandez de Kirchner demanded they be handed over. The U.K. and Argentina went to war in 1982 over the South American islands.
“I get regular reports on this entire issue because I want to know that our defenses are strong,” he said. ‘Our resolve is extremely strong.”
To contact the reporter on this story: Simon Kennedy in London at Skennedy4@bloomberg.net
To contact the editor responsible for this story: James Hertling at email@example.com