Morgan Stanley: Bank of England to cut interest rates five times in 2025
Morgan Stanley expects the Bank of England to cut interest rates five times in 2025 in an attempt to support a stuttering economy.
The US investment bank slashed its growth forecasts on Monday, citing both the lingering impact of the Bank’s monetary tightening and the fallout from the Budget.
It expects the UK economy to grow 0.9 per cent in 2025, down from a previous estimate of 1.3 per cent and comfortably below the consensus among City economists.
“While the peak impact of the Bank of England’s policy tightening is likely behind us, its drag on the economy still persists,” analysts at the bank wrote.
The measures announced in the Budget have also dented sentiment among businesses, the analysts noted.
Even before the rise in employment costs, the analysts said there was “limited hiring appetite”.
Since the Budget, demand has been “lacklustre to non-existent”.
The most recent purchasing managers’ index (PMI) showed that firms have cut roles at the fastest pace since the financial crisis over the past couple of months, excluding the pandemic.
“The mood music has deteriorated meaningfully since the summer,” the analysts said, predicting the Bank would put more weight on weakening activity than signs of persistent inflation.
Morgan Stanley’s forecasts would see the Bank Rate end the year at 3.50 per cent, down from 4.75 per cent at the moment.
Fellow Wall Street giant Goldman Sachs also anticipates that the Bank will cut rates aggressively, forecasting six interest rate cuts by mid-2026.
Both forecasts are significantly more dovish than market pricing, which implies a total of three or four rate cuts by the middle of next year.
Policymakers will meet again on 6 February, and are expected to back a third rate cut.
The rate outlook for the rest of the year remains much more uncertain. Although the most recent figures showed that inflation came in below expectations, most economists anticipate that it will rise to around 3.3 per cent by the spring.