(Bloomberg) -- Two forecasters who warned that UK interest rates may reach 7% have said the risk has receded following a big drop in the headline inflation rate this week.

Allan Monks, economist at JPMorgan Chase, said “the risk has declined,” but inflation could still “get stuck above 2%.” 

Adam Posen, president of the Peterson Institute for International Economics and a former member of the Bank of England’s rate-setting committee, said, “The market is right to downgrade the likelihood of the monetary policy committee going towards 7%, but it shouldn’t yet be ruled out.”

Both said the central bank may still have to raise rates above 6% to squeeze inflation down to its 2% target. “If this persists for long enough then inflation expectations could rise as result and force the BOE to hike beyond 6%,” Monks said.

The economists raised the alarm earlier this month after a series of UK inflation overshoots and signs that the BOE was struggling to rein in a wage-price spiral, which remains the highest in the Group of Seven advanced economies.

Official inflation figures Wednesday showed the Consumer Prices Index fell to 7.9%  in June, the lowest in 15 months. Underlying price pressures also declined, easing fears of an inflationary spiral. 

“We have been in the camp that the market is pricing in too much from the BOE and that the BOE won’t be able to deliver,” said Mohit Kumar, a rates strategist and economist at Jefferies, who recommends investors hold a long position in UK bonds. “Yesterday’s inflation print supports our view.”

Earlier this month, interest-rate traders were entertaining the prospect of a 6.75% terminal rate, which would have been the highest in a quarter century. They’ve since tempered those expectations and expect the BOE to raise rates at most by a further one percentage-point to 6% by early next year.

The repricing has buoyed gilts and weakened the pound. The yield on 10-year government bonds has dropped more than 15 basis points this week, the most among major peers. Sterling is down close to 2% over the same period, the worst performing currency in the Group-of-10 after the New Zealand dollar.

Posen said markets are now understating the risk that inflation becomes entrenched. He believes the BOE will have to raise rates to 6% or 6.25%. Monks’ central forecast is for a 5.75% peak rate. 

Both said it was too early to take much comfort that inflation will keep falling. 

“I would like to see a couple more months of core and/or services inflation trending downwards before being confident that the bank has raised rates enough,” said Posen.

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