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

Interest rates will fall to 2.75 per cent over the course of the coming year in a boost for millions of borrowers, Goldman Sachs has predicted.

Economists at the Wall Street giant believe the Bank of England will cut more sharply than suggested by market pricing, which points to rates falling to 3.5 per cent.

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

The Bank of England hiked interest rates from 0.1 per cent at the end of 2021 to 5.25 per cent in the summer of 2023 as it battled to bring double-digit inflation under control. 

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

But it has come under pressure to go faster, especially after the US Federal Reserve announced a half percentage point cut last month, while the European Central Bank has carried out three quarter-point cuts this year.

Goldman’s latest UK prediction is based on its calculation of the ‘neutral’ rate of interest at which the economy can maintain the balance between low unemployment on one hand and inflation at its 2 per cent target on the other.

By that measure, the current Bank rate is ‘notably restrictive’, the analysis argues.

That means interest rates are still working to squeeze economic growth and crush inflation, even though inflation has now fallen below 2 per cent.

In a note to clients, Goldman said its analysis ‘thus reinforces our view that the Bank of England will ultimately lower rates more than priced by financial markets given continued progress on disinflation’.

It also pointed to ‘recent dovish commentary’. That is likely to be a reference to remarks by Bank of England governor Andrew Bailey, who said that it could be ‘a bit more aggressive’ in cutting rates if inflation remains under control.

However, other language from Bank rate setters has been notably more cautious. 

Yesterday, in a column for the Financial Times, MPC member Megan Greene said that the strength of consumer spending – a key factor in calculating how quickly to cut rates – remained 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, although he does not see them falling quite as fast.