The recent weakening in employment, easing in wage growth and signs that households are saving more and spending less have provided more confidence that higher interest rates are working. But we think that the restraints on UK labour supply and sticky inflation expectations will mean core inflation and wage growth ease only slowly. We don’t expect core CPI inflation to fall from 6.2% in September to the 2.0% target until late in 2024. As a result, we think interest rates will stay at their peak of 5.25% for longer than investors expect. But when rates are eventually cut late in 2024, we think they will be cut further than investors expect to 3.00% in 2025 rather than to the level of 4.00%-4.25% priced into the markets.
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