Higher rates priced in, but much weaker growth isn’t

The recent resilience of economic activity has left us comfortable with our view that the Bank of England will raise interest rates from 4.00% now to a peak of 4.50%, rather than to 4.25% as analysts expect, and keep rates at that higher level all year. This increasingly seems to be the view of investors. 10-year gilt yields have risen by 60 basis points since 2^nd February. What’s more, the turnaround in market interest rate expectations has been remarkable. Only 20 days ago, investors anticipated rates rising from 4.00% now to a peak of about 4.25% and falling below 4.00% by the end of this year. Now investors are pricing in rates rising to almost 4.75% and ending the year at 4.50%. We largely agree. But we think that the economy will weaken further than most expect. That’s why we are sticking with our view that equities and sterling will come under more downward pressure in the coming months.