Our forecast that in late 2024 and 2025 the Bank of England will cut interest rates further than investors expect suggests that UK gilt yields will fall and close the current gap with US yields. Admittedly, there’s still a risk that inflation in the UK stays higher for longer than elsewhere and that the Bank raises interest rates from 5.00% now to above our forecast of a peak of 5.50%. And concerns that the Labour Party could loosen fiscal policy if it were to win a possible election in late 2024 may also support UK bond yields relative to yields elsewhere. But our central forecast is that by 2025 UK CPI inflation will have fallen to the 2% target and won’t be any higher than elsewhere, Bank Rate will be cut to 4.50% by the end of 2024 and to 3.00% by the end of 2025 and the Labour Party will show more fiscal discipline than some fear. As such, we expect 10-year gilt yields to fall from 4.30% now to 3.00% by end-2025.
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