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Bank of England set to undermine UK recovery

This week will see the Bank of England warn UK politicians, UK businesses and UK consumers that the country is still at risk of a Japanese-style slump which we saw in the 1980s. During that period the Japanese economy was under pressure for more than a decade and the country was annihilated by deflation. But is the UK really at risk of a Japanese-style slump?

The very fact that the Bank of England will this week reduce growth forecasts for the UK economy, despite a variety of more positive reports being released of late, has caught the attention of many analysts. Mervyn King, the Gov of the Bank of England, is set to describe deflation as the biggest risk to the UK economy in the short to medium term. He will also confirm that this is the reason why the quantitative easing program was extended last week with a further £50 billion injected into the operation.

There are also murmurings in the background from prominent economists who believe that the UK economy may well enjoy a short lived recovery in 2009 but could face a slump in 2010. Whether UK consumers, UK businesses and UK banks are being drawn into a potentially short lived recovery remains to be seen but the situation could get very much worse before it gets better.

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