Interest rates are on course to fall to 2.75% by next autumn after the Bank of England reduces the cost of borrowing at each of its nine next meetings, a leading investment bank has predicted.
Economists at Goldman Sachs said that, according to their assessment of the long-term level of interest rates consistent with achieving the government’s 2% inflation target, markets were underestimating the likely extent of the action by Threadneedle Street’s nine-strong monetary policy committee (MPC).
“Our findings suggest that Bank rate remains notably restrictive and – together with rapidly falling inflation and dovish MPC commentary – reinforces our view that the Bank of England will ultimately lower rates more than priced,” the US lender said in a research note.
“We remain comfortable with our forecast for consecutive 0.25-point cuts and lower our terminal Bank rate forecast to 2.75% in November 2025 (from 3% in September 2025), notably below current market pricing.”
Financial markets think there is a 98% chance of the Bank cutting rates from 5% to 4.75% next month and that borrowing costs will continue to fall, to 3.75% or lower, by November 2025.
Andrew Bailey, the Bank’s governor, fuelled speculation that the MPC would step up the pace of rate cuts when he told the Guardian this month that a more “aggressive” approach was possible.
Goldman’s said it was basing its view of the future course of interest rates on its estimate of r*, the neutral real rate of interest that is neither expansionary nor contractionary while the economy is at full employment with inflation at target.
The analysis concluded that r* had trended down strongly in recent decades and had risen moderately since the start of the Covid-19 pandemic. Goldman’s estimates suggest r* is at about 0.75%, which implies a nominal neutral rate of about 2.75% with inflation at the 2% target.
Separate research by economists at Deutsche Bank said policy was currently restrictive and predicted that the Bank would respond to a slowing economy, weaker pay growth and an easing in service sector inflation by cutting rates at each of the five MPC meetings between next month and May 2025, taking them to 3.75%.
