Markets are not braced for how far inflation will fall

Our forecast that CPI inflation will fall below 1.0% later this year suggests that Bank Rate will be cut from 5.25% now to 3.00% rather than the low of 3.50-3.75% priced into the market, 10-year gilt yields will decline from 3.90% now to around 3.25% by the end of this year and the pound will weaken from $1.27 now to about $1.20. The combination of lower interest rates, an economic recovery and more enthusiasm about Artificial Intelligence (AI) means 2024 and 2025 will probably be good years for UK equity prices, although UK equities are unlikely to keep pace with US equities.