We’ve become a bit more confident in our forecast that the Bank of England will raise interest rates from 5.25% now to a peak of 5.50%, rather than much further, as higher interest rates appear to be weighing more heavily on activity. The peak in UK market rate expectations has fallen from 6.00% to 5.75% as investors concluded that a weaker economy will trim inflation and the Bank has less work to do than previously thought. What’s more, we think the prospect of a mild recession could lead to a further fall in rate expectations in late 2024. That’s why we expect the 10-year gilt yield to decline from 4.45% now to around 3.00% by the end of 2025.
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