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Will UK inflation fall back to 2% within 12 months?

As the rate of inflation increased from 3.4% to 3.7% between March and April there are concerns that UK base rates may have to rise in the short to medium term to combat the threat of inflation. Despite the fact that Mervyn King, the governor of the Bank of England, is adamant that inflation will return to around about the 2% level over the next 12 months not everybody is of the same opinion. So Will UK base rates rise in the short to medium term?

Despite a denial by the Bank of England of plans to increase base rates towards the end of 2010 in the eyes of many investors and experts it seems inevitable we will see movement. Let us not forget that UK base rates are stuck at 0.5% and have been there for some time as a means of injecting low-cost capital into the money markets. Unfortunately, so far this has not had the desired effect and while liquidity is still relatively thin regarding personal loans and mortgages, inflation is being impacted by events out of the control of the UK government and the Bank of England.

While inflation may well collapse in the latter part of 2010 we need to get ourselves ready for a potential increase in base rates and the knock on effect this may have in other areas of the UK financial market.

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