Fall in gilt yields won’t last, equities to trough sooner

Given our forecast that the Bank of England will raise interest rates from 1.25% now to a peak of 3.00%, we still think that gilt yields have further to rise. However, with attention in the markets turning towards the prospect of lower inflation and interest rate cuts further ahead as economic activity weakens, we have revised down our 10-year gilt yield forecast. We now expect the 10-year gilt yield to rise from 1.95% currently to 2.50% by the end of this year (3.00% previously), before falling to 2.25% by the end of 2023 (2.75% previously). We also think that the darkening outlook for the global economy will cause UK equity prices to fall a bit sooner. We now think the FTSE 100 will fall from about 7,400 currently to a low of around 6,700 by the end of 2022 (rather than to a low of 6,600 by the end of 2023). Bank of England Drop-In (4^th August, 10:30 ET/15:30 BST): Join our post-MPC, 20-minute online briefing to find out why we think UK rates will rise by more than most expect, despite a looming recession. Register now.