Bank of England: Goldman Sachs expects deep interest rate cuts
Markets are significantly underestimating the chance that the Bank of England will have to step up the pace of cutting interest rates, Goldman Sachs has argued.
Traders anticipate just two interest rate cuts this year with one more cut priced in for 2026, which would leave the benchmark Bank Rate at 4.0 per cent. It currently stands at 4.75 per cent.
Investors are concerned by signs of stubborn inflationary pressures in the UK economy, with many economists predicting that the headline rate will increase to over three per cent in the spring.
Figures out yesterday also showed that private sector pay growth hit 6.0 per cent in the three months to November, well ahead of expectations.
The US investment bank acknowledged that price pressures were “uncomfortably high”, but said there were “several indications” that the medium-term inflation outlook was “softening”.
“Growth has weakened markedly…household real disposable income growth is likely to slow…and rising trade tensions are likely to weigh on activity,” analysts led by Sven Jari Stehn said.
They expect the UK economy to grow 0.9 per cent in 2025, notably behind the consensus estimate of 1.3 per cent.
Inflation scepticism grows
Pointing to a range of business surveys and yesterday’s unemployment figures, the analysts also said there were “notable signs of underlying cooling” in the labour market, which should help to contain pay growth.
“We are sceptical that Bank Rate can stay above four per cent persistently – as priced by financial markets – without materially weakening the economy and thus inflation,” they said.
Goldman anticipates that interest rates will fall to 3.25 per cent by mid-2026.
“While it is possible that the BoE will slow the pace of cuts if underlying inflation fails to make progress, we believe that a step-up to a sequential pace of cuts in response to weaker demand is actually more likely,” they argued.
Investors expect the Bank to back another rate cut in February as concerns about the economic outlook grow.
Three members of the nine-strong Monetary Policy Committee (MPC) voted to cut rates in December as the Bank said the economy was stagnant in the fourth quarter.
Alan Taylor, a member of the MPC, recently suggested that the Bank might have to cut rates as many as six times in 2025 to support the economy.