Goldman Sachs expects significant interest rate cuts

Wednesday, January 22, 2025 11:07 a.m.

Goldman Sachs argued that markets were significantly underestimating the possibility that the Bank of England would have to accelerate the pace of rate cuts.

Traders expect only two rate cuts this year, with one more cut priced in 2026, which would leave the benchmark bank rate unchanged at 4.0%. Currently it is 4.75%.

Investors are concerned about signs of stubborn inflationary pressures in the UK economy, with many economists expecting headline interest rates to rise above 3% in the spring.

Statistics released yesterday also showed private sector wage growth reached 6.0% in the three months to November, well above expectations.

The US investment bank acknowledged that price pressures were “uncomfortably high” but said there were “some signs” that the medium-term outlook for inflation was “softening”.

Analysts led by Sven Jari Steen said: “Growth has slowed significantly…Growth in real household disposable income is likely to slow…and rising trade tensions could weigh on economic activity. is high,” he said.

They expect the UK economy to grow by 0.9% in 2025, notably below the consensus forecast of 1.3%.

Inflation skepticism grows

Analysts also pointed to various business surveys and yesterday’s unemployment figures, saying there were “significant signs of fundamental cooling” in the labor market, which would likely dampen wage growth.

“We are skeptical that the bank rate can sustainably remain at 4%, as priced in by financial markets, without significantly weakening the economy and thus inflation,” they said.

Goldman expects interest rates to fall to 3.25% by mid-2026.

“If underlying inflation does not progress, it is possible that the Bank of England will slow the pace of production cuts, but in reality we think it is more likely that they will gradually increase the pace of production cuts in response to weak demand,” they said. insisted.

Investors expect the central bank to support further interest rate cuts in February as concerns grow over the economic outlook.

Three members of the nine-strong Monetary Policy Committee (MPC) voted in favor of lowering interest rates in December after the central bank said it expected the economy to stagnate in the fourth quarter.

MPC member Alan Taylor recently suggested the central bank may need to cut rates up to six times in 2025 to support the economy.