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Pricing in higher inflation and interest rates

The jump in 10-year gilt yields from 0.29% at the end of January to 0.76% now has been driven by the markets pricing in a rise in inflation after the pandemic that they think will eventually prompt the Bank of England to raise interest rates sharply. With the Bank having done a fairly good job of anchoring short yields, the yield curve has steepened. We think this trend has further to run. Admittedly, we are not convinced that the Bank will end up raising interest rates sharply. But we do think that inflation will be persistently above 2% from 2023, if not before. As such, we have revised up our 10-year yield forecasts to 1.25% by the end of this year and to 1.50% by the end of next year.

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