Boost for borrowers as Goldman Sachs predicts interest rates will fall to 2.75% by 2025

Interest rates will fall to 2.75 percent over the next year, a boost for millions of borrowers, Goldman Sachs has predicted.

Economists at the Wall Street giant believe the Bank of England will make sharper cuts than market prices suggest, suggesting interest rates will fall to 3.5 percent.

Goldman’s forecast would mean a quarter-point rate cut at all nine meetings of the Bank’s Monetary Policy Committee (MPC) from November 2024 to November 2025.

The Bank of England raised interest rates from 0.1 percent at the end of 2021 to 5.25 percent in summer 2023 as it battles to control double-digit inflation.

But inflation has been at or around the 2 percent target for six months and fell below that level to 1.7 percent in September – the lowest level in three and a half years. The Bank cut interest rates to 5 percent in August.

But the economy is under pressure to move faster, especially after the U.S. Federal Reserve announced a half-percentage-point cut last month, while the European Central Bank has implemented a three-quarter-point cut this year.

Goldman’s latest UK forecast is based on calculating the ‘neutral’ interest rate at which the economy can maintain the balance between low unemployment on the one hand and inflation at the 2 percent target on the other.

By this measure, the current bank rate is “significantly restrictive,” the analysis says.

That means interest rates are still squeezing economic growth and crushing inflation, even though inflation has now fallen below 2 percent.

In a note to clients, Goldman said its analysis “reinforces our view that the Bank of England will ultimately cut rates more than what financial markets are calling for, given continued progress on disinflation.”

Reference was also made to ‘recently softened commentary’. That is likely a reference to comments from Bank of England Governor Andrew Bailey, who said the rate cut could be “slightly more aggressive” if inflation remains under control.

However, other language used by the banks’ interest rate setters was noticeably more cautious.

Yesterday, MPC member Megan Greene said in a column for the Financial Times that the strength of consumer spending – a key factor in calculating how quickly to cut interest rates – remains uncertain.

“Given these risks, I believe a cautious, gradual approach to monetary easing is appropriate,” she said.

Steven Bell, chief economist at Columbia Threadneedle Investments, shares Goldman’s optimism about the pace of rate cuts, even if he doesn’t see them falling that quickly.