Our forecast that lingering price pressures will prompt the Bank of England to raise interest rates from 0.50% now to a peak of 2.00% next year suggests there is little scope for market interest rate expectations to rise further. Even so, we think that an increase in uncertainty about the outlook for inflation and interest rates as well as the influence of the Bank of England reducing its holdings of gilts via quantitative tightening will mean that 10-year gilt yields rise from 1.40% now to around 2.25% by the end of 2023. And as the make-up of the FTSE 100 means it is less exposed to higher interest rates, UK equity prices may outperform US prices and rise by more than 10% this year. That all said, the Russia/Ukraine conflict is reducing rate expectations, gilt yields, equities and the pound, and the risk is that this influence is not just short-lived.
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