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Higher for longer narrative has gone too far

While we think sticky core inflation will mean that the Bank of England keeps interest rates at their peak of 5.25% until late in 2024, we think the markets have gone too far in concluding that rates will still be as high as 4.50% by the end of 2025. We think a mild recession and an eventual easing in core inflation will mean interest rates will fall to 3.00% by the end of 2025. That explains why we think 10-year gilt yields will decline from 4.50% now to 3.50% by end-2024. The prospect of lower interest rates and a stronger economy should buoy equities prices, although we think that a further bout of enthusiasm for Artificial Intelligence (AI) will be the main driver behind the FTSE 100 ending 2024 almost 20% above current levels.

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