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Rates to stay higher for longer to quash inflation

Growing evidence that UK price pressures are becoming increasingly domestically generated has driven up market interest rate expectations and at one point pushed the 10-year gilt yield up to 4.38% in late May, close to its peak seen after the “mini-budget”. We agree with the markets that rates will rise further and have revised up our forecast for the peak in Bank Rate by 75 basis points, from 4.50% to 5.25%. And we now think rates won’t start coming down until the second half of next year (rather than early 2024 previously.) But while higher rates are priced into the markets, the likely dent to the real economy from the high level of interest rates isn’t. That’s why we think there is scope for market rate expectations to fall back in 2024 and why we expect the 10-year gilt yield to drop to 4.00% by the end of this year, to 3.25% by the end of 2024 and to 3.00% by the end of 2025.

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