Interest rates will only fall to 3.75% next year, Santander says – days after Goldman Sachs’ much sharper forecast

Interest rates will fall to 3.75 percent by the end of next year, banking giant Santander has predicted, bucking the trend of bolder rate cuts.

With the Bank of England’s base rate currently at 5 percent, this would mean a cut of 1.25 percentage points by Christmas 2025.

Santander’s prediction comes days after Goldman Sachs’ prediction that interest rates would fall to 2.75 percent over the same period raised eyebrows.

Looking further ahead, Santander economists also think UK interest rates will remain between 3 and 4 percent for the foreseeable future.

Graham Sellar, head of intermediary channels at Santander UK, said: ‘While no one has a crystal ball, as we head towards the next MPC meeting and an expected 0.25 per cent cut to base, we can safely assume that The ultra-low base interest rate of recent years is now a thing of the past.

“Instead, we are moving towards a new normal, in which the base interest rate will not only fall to 3.75 percent at the end of next year, but will remain between 3 and 4 percent for the foreseeable future.”

If the prediction turns out to be correct, it will probably mean that mortgage rates will change little in the future.

This is because currently future interest rate cuts are already embedded in fixed mortgage interest rates.

This is why the lowest priced five-year fixed income products hover just above 3.75 percent, rather than closer to the Bank of England’s base rate of 5 percent.

Graham Sellar added: ‘Although the base rate does not determine the mortgage rate, it can influence the swap rate, which is the interest rate that lenders pay to financial institutions to obtain fixed financing for a certain period.

‘This means that those looking to buy a property or take out a new mortgage are likely to see rates relatively static compared to the volatility of recent years.’

Santander’s forecast is in stark contrast to that of Goldman Sachs. Economists at the Wall Street giant now predict that UK interest rates will fall to 2.75 percent over the next year.

This would mean that the Bank of England would make much sharper cuts than Santander or the wider market who are currently pricing this in.

Mortgage brokers have raised concerns about the accuracy of Goldman Sachs’ forecasts and are concerned that it could influence borrowers’ decisions.

For example, people can opt for shorter-term fixed deals or two-year trackers in the hope that they can benefit if interest rates fall.

Dariusz Karpowicz, director of Albion Financial Advice, accused the investment banking firm of playing crystal ball and warned it should not be treated as a “financial gospel”.

Karpowicz told news agency Newspage: “While their forecast of a base rate of 2.75 percent next year certainly raises eyebrows, we must remember that economic forecasts are often as reliable as the British weather.”

‘If interest rates were to fall this low, we could witness a real estate market boom that would make the Roaring Twenties seem tame.

“Let’s not count our rate cuts before they come true. If a week is a long time in politics, a year in economics is an eternity.’

Craig Fish, director of Lodestone Mortgages & Protection, also thinks Goldman Sachs is way off with its latest forecast.

‘If we see the base interest rate at 3.5 percent, we are lucky. The Bank of England is likely to take a much more cautious approach to avoid repeating past mistakes.

‘Reporting such predictions is irresponsible and only worsens the situation.

“Consumers may be tempted to wait or hold on to the hope that these low rates will materialize, but that is highly unlikely. Their decisions based on this misinformation could have serious consequences.”

Justin Moy, director of EHF Mortgages, also says that a base rate of 2.75 percent at the end of next year is a bit extreme.

“To achieve that would require severe economic stagnation over the next 12 months,” Moy added.

“Unfortunately, the low-interest rate narrative is having a significant impact on mortgage borrowers looking for solid guidance in making their decisions, especially as swap rates rise and fixed rates move higher.”

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 is being demanded by financial markets, 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.