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Defaqto warns on economic prospects

There are "good reasons" to expect the UK to experience deflation in the near future, Defaqto has said.According to the research firm, Britons could experience falling prices due to the current financial downturn - a trend which could make the slowdown even worse than it would be otherwise.This is because deflation can create a "negative feedback loop" in the economy, with consumers putting off purchases in the expectation that goods will become cheaper due to the slowdown - thereby making the slowdown worse in the process.Defaqto also predicted further big interest rate cuts from the Bank of England, which has lowered the base rate by 200 basis points over the past two months.Michael Baxter, economist at Defaqto, said: "I think there are good reasons to expect deflation… It frequently occurs when [you] have crashing asset prices and house prices and equities are falling in tandem like they are at the moment."I'm quite sure that inflation is just going to fall and fall and will probably go negative at some stage next year [and] I'd expect [interest rates] to fall to at least one percent by the end of [2009]."

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