Markets too sanguine on interest rates

Our new forecasts that inflation will stay higher for longer and that the labour market will remain tight into 2023 suggests that Bank Rate will rise to a peak of 3.00% next year rather than the peak of 2.50% currently priced into the markets. As a result, we have revised up our forecasts for gilt yields. We now think the 10-year yield will rise from 1.84% to 3.00% by the middle of 2023. And in response to the prospect of weaker economic growth and higher interest rates, we have revised down our equity price forecasts. We expect the FTSE 100 to fall from 7,550 now to around 7,250 by the end of this year. Finally, this negative shift in investor sentiment partly explains why we have revised down our forecasts for the pound. We think the pound will weaken from $1.26 now to around $1.22 by December. UK Drop-In (Thurs. 5^th May, 15:30 BST): Paul Dales and Ruth Gregory will be discussing our UK Economic Outlook, including our above-consensus call for UK interest rates, in a 20-minute online briefing after the May MPC meeting. Register now