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Top economist believes UK base rate could remain low for years

Gerard Lyons, the chief economist at Standard Chartered Bank, has today issued his own comments and opinion on the UK economy. In direct contradiction to the vast majority of economists in the city he believes that the Bank of England has been hinting for some time that UK base rates will remain low for years to come and that deflation is the major problem rather than inflation. So who is right?

The very fact that the Bank of England, and Mervyn King in particular, was even considering a further £25 billion increase in the quantitative easing program shows that inflation is not uppermost in their minds. Their main concern at this point in time is both the short to medium term direction of the UK economy and the ongoing threat of deflation as businesses continue to struggle, the property market has yet to recover and unemployment has some way to go yet.

While Gerard Lyons' comment that interest rates may not rise until 2013 is not one which is widely held in the City, the fact that inflation is not even a consideration of the Bank of England at this moment in time is interesting. Ultimately, interest rates are used as a very basic tool to control the flow of credit in the UK and if inflation is not a problem then ultimately why raise rates in the short to medium term?

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