Rate worries ease as growth fears build

Signs that the UK’s economic recovery has lost steam have taken their toll on UK markets. Interest rate expectations have fallen back sharply, even though CPI inflation looks on track to rise to near 5% later this year. Meanwhile, UK bonds have outperformed those in other regions, while UK equities have underperformed. Looking ahead, we doubt that the economic recovery will gather pace over the next year or so as the fiscal squeeze tightens and consumers continue to retrench. As a result, we still expect interest rates to remain on hold for the foreseeable future and government bond yields to grind lower.