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UK inflation falls to 1.6%

As UK inflation continues to fall, amid signs that supermarkets around the UK are still determined to fight for customers, there is a feeling that inflation will continue to fall until 2010. While this is obviously helpful for consumers and businesses in the short term, it will reduce the opportunities to increase profit margins and ultimately get the UK corporate sector back on the rails.

There is also the potential problem of deflation, if the UK inflation rate was to fall constantly for a prolonged period. In order to try and prevent such a move, Mervyn King, the Gov of the Bank of England, has already suggested that the government's £175 billion quantitative easing program could well be extended if deflation does become a serious threat. There is also an interesting suggestion that the Bank of England would reduce the rate which banks receive for money held with the Bank of England in order to try and force them to increase liquidity in the UK mortgage and loans market.

While there have been increases in liquidity in the mortgage and loan markets of late, they are nowhere near the level required to assist with an eventual economic upturn. Twisting of arms, negative headlines and other such strategies have so far failed to work and the UK banks are certainly sticking to their guns at the moment.

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