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A tough year

2023 will be a tough year for the economy as the effects of the previous rises in inflation and previous hikes in interest rates (as well as a future rise from 3.00% now to a peak of 4.50% in early 2023) are felt. Our view that inflation and interest rates will be a bit higher than most forecasters expect in 2023 explains why we think the recession will be deeper and will involve a 2.0% fall in real GDP. The good news is that we think the recession will end in the second half of 2023 and a gradual fall in inflation will probably allow the Bank of England to inject more vigour into the recovery by cutting interest rates in 2024. Our view that interest rates will be reduced from 4.50% to 3.00% by the end of 2024 envisages more cuts than either the consensus or the markets.

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