Upside risks to interest rates have increased

We still think that a fading in services inflation and below-target CPI inflation will prompt the Bank of England to cut interest rates from 5.25% now to 3.00% by the end of 2025, rather than to 4.00% as investors anticipate. That explains why we think 10-year gilt yields will decline by more than 10-year US Treasury yields, from 4.05% now to around 3.25% next year and the pound will weaken from $1.28 now to $1.25 by the end of 2024 ($1.22 previously). Meanwhile, we think the inflating of the AI bubble has further to run and the FTSE 100 will rise by 15% from around 8,300 now to about 9,500 by the end of 2025. But the strength of activity, sticky services inflation and the government’s intention to raise public spending by £16.4bn (0.6% of GDP) in 2024/25 increase the risk that Bank Rate is cut more slowly than we expect and that sterling and gilt yields don’t fall quite as far.