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Stagflation stalking the markets

If we are right in expecting inflationary pressure to stay strong even as the economy gets dangerously close to a recession, then the prices of gilts and UK equities will probably fall further over the next year. Our forecast that the Bank of England will raise interest rates from 1.00% now to 3.00% next year would take rates above the peak of 2.50% priced into the markets and would therefore suggest that 10-year gilt yields will rise further than widely expected (perhaps from 1.90% to 3.00%) and that the FTSE 100 will fall further (perhaps from 7,500 to 6,800). The risk is that an even weaker economy prompts equity prices to fall further. And with inflation high, the markets can’t rely on the Bank of England to provide any relief.
Paul Dales Chief UK Economist
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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 (4th 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.  

29 July 2022

UK Markets Chart Book

Gilts to struggle sooner, equities to struggle for longer

We haven’t changed our forecast that the Bank of England will raise interest rates from 1.25% now to a peak of 3.00% by the middle of next year. But we do now think that a number of other central banks will raise interest rates faster and to higher levels to try and get on top of inflation. As a result of these global factors, we now think that 10-year gilt yields will rise from 2.35% currently to a peak of 3.00% by the end of this year rather than to 3.00% by the middle of next year. We also think the FTSE 100 will fall from 7,050 now to a trough of around 6,600 by the end of next year (rather than to a low of 6,800 by the middle of next year). In other words, rises in global interest rates and the toll they will take on activity will result in the prices of gilts falling faster and UK equity prices falling further and for longer.

23 June 2022

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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. 5th 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

29 April 2022

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