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Benign inflation outlook taking centre stage again

The prospects for inflation are once again becoming the key factor driving monetary policy decisions by the Fed and the Bank of England, as both central banks have been forced to re-think their approach to forward guidance. At the same time, the risk of deflation is now the ECB’s main concern, while the Bank of Japan remains focused on how it can achieve its ambitious 2% inflation target. With little sign that underlying price pressures are picking up, the (renewed) emphasis on inflation prospects should allow central banks to maintain exceptionally loose monetary policy for the foreseeable future.

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