Goldman Sachs foresees a potential drop in UK interest rates to 2.75% by November 2025, contrary to market expectations.
- Currently, the UK base rate is 5%, identified by Goldman as “notably restrictive.”
- Market consensus anticipates a slower rate reduction, settling at approximately 3.5%.
- Goldman’s forecast coincides with Deutsche Bank’s, although both predict different timelines.
- Inflation trends, fiscal policies, and economic factors crucially influence the Bank of England’s decisions.
Goldman Sachs projects a significant reduction in UK interest rates, anticipating a drop to 2.75% by November 2025. This prediction diverges from the market consensus, which expects a more gradual decrease to around 3.5%. Goldman Sachs views the current 5% base rate as overly restrictive, suggesting more aggressive rate cuts than the market anticipates as inflation continues to ease.
Deutsche Bank aligns with Goldman Sachs’ prediction of a faster-than-expected decline in interest rates but forecasts a deceleration, expecting rates to stabilize at 3% by February 2026. Meanwhile, financial markets currently predict two minor reductions by the Bank of England in November and December, potentially bringing the rate to 4.5%.
Inflation has decreased more swiftly than anticipated, with a notable drop from 2.2% in August to 1.7% in September. This trend has amplified expectations that the Bank of England might ease its monetary policy. Nevertheless, opinions within the Monetary Policy Committee (MPC) vary regarding the pace of these changes. Governor Andrew Bailey indicates potential aggressive rate reductions if inflation stabilizes, contrasting with Chief Economist Huw Pill’s more cautious stance. Insights from upcoming International Monetary Fund discussions are expected to refine the Bank’s strategy.
The determination of the “neutral interest rate” remains a significant challenge. Goldman Sachs estimates this rate at 2.75%, higher than the negative real rates following the global financial crisis. After considering inflation, the real neutral rate is approximately 0.8%. However, numerous factors, such as sluggish productivity, growing public debt, and an aging population, complicate this estimation. The UK’s debt-to-GDP ratio has alarmingly risen from 35% in 2007 to nearly 100%, the highest since the 1960s, intensifying economic pressures.
Chancellor Rachel Reeves is anticipated to increase borrowing in the forthcoming Autumn Budget to invest in public infrastructure—an approach aimed at fostering long-term growth rather than short-term fiscal relief. This move is not expected to lead to the market volatility witnessed during the previous administration’s tax reductions. Such fiscal strategies coincide with estimates of the country’s neutral interest rate to guide monetary policy, albeit with substantial uncertainty. A miscalculation could either restrict economic growth by setting rates too high or fuel inflation if set too low.
The Bank of England remains circumspect in estimating the neutral rate, cautious about over-reliance on these figures. As the debate over the pace of interest rate cuts continues, it will be substantially informed by evolving economic data, particularly inflation trends and international economic conditions. The possibility of interest rates plunging to 2.75% next year places businesses and consumers on high alert to observe the Bank of England’s responsive strategies.
As inflation trends and economic conditions evolve, the Bank of England’s monetary policy decisions remain under scrutiny to support the UK economy effectively.
