Is UK facing Japan style lost decade?
The expansion of the QE programme prompted fears that the UK may follow Japan and fall into a deflationary trap and as such, the latest CPI projections are likely to be closely followed. In Japan, central bankers tightened their policy too early, which led to the so called lost decade. Clearly the MPC members are keen avoid the same mistakes, and as such it is more likely that Mervyn King will leave the door open for further measures, rather than follow the FOMC board and talk of exit strategies. Any such talk of extending the QE programme beyond the current GBP 175bln ceiling would likely see gilt yields plunge; however the MPC would be eager to suppress any inflationary concerns caused by such action and may say that tightening will be brisk when economic conditions stabilise.
