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UK base rates could remain unchanged until 2014

Despite the fact there are hopes that the UK economy will start to recover in 2011 the influential Ernst & Young Item club has issued a statement suggesting that base rates will remain at 0.5% until at least 2014. While on the surface this would appear to be a damning indictment of George Osborne's handling of the economy so far, surprisingly the Item club has confirmed that in their opinion he is "doing the right thing". So what can we expect in the future?

There is no doubt that the UK economy will suffer from a drag effect purely and simply because of the reduction in public sector spending and increased taxes in the short term, but hopefully this will create a firmer base from which to grow in the future. Interestingly, the Item club also believes that UK inflation will remain relatively low and will fall back in the short to medium term, in line with forecasts from the Bank of England, which has always had a belief that inflation will not be a long term problem.

The truth is there is no simple solution to the UK economic situation at the moment and George Osborne appears to be making headway in a very difficult environment.

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