The recent easing in price pressures and the Bank of England's new-found dovish slant has convinced investors that interest rates will be cut a bit further over the next two years. But we still think investors are underestimating how far rates will fall. Our view that CPI inflation will drop from 3.4% in February to just 0.5% later this year and spend all of 2025 and 2026 below the 2.0% target explains why we think the Bank will cut interest rates from 5.25% to 3.00% next year, rather than to 3.75% as investors currently expect.
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