Although we agree with the markets that the Bank of England will be patient and won’t pivot from raising interest rates to actually cutting interest rates until 2024, we think that fading inflation will force the Bank to cut rates quicker than investors expect. After raising rates from 3.00% now to 4.50% early next year, we think the Bank will reduce rates to 3.00% in 2024 compared to the fall to 4.00% priced into the markets. If so, 10-year gilt yields may decline from 3.10% now to around 2.75% by the end of 2023 and to around 2.50% by the end of 2024. While the prospect of lower interest rates will eventually buoy equity prices and the pound, we think the markets are underestimating the damage higher interest rates will inflict on the economy. That’s why we think the FTSE 100 will reverse all of the recent rally and fall to a new cycle low in the middle of 2023 and why we think the pound will slip from $1.20 now to around $1.05.
In view of the wider interest, we are also sending this UK Markets Outlookto clients of our UK Commercial Property Service.
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