Goldman Sachs Forecasts Bank of England’s Interest Rate Strategy Amid Economic Uncertainty

The latest forecasts from Goldman Sachs indicate that the Bank of England is likely to maintain higher interest rates for an extended period before implementing more pronounced cuts than previously anticipated in the latter part of the year.

In a research note released on Tuesday, the Wall Street bank adjusted its projections for rate reductions, postponing them by one month, from May to June, citing several influential inflation indicators that are “on the firmer side.” However, it foresees the central bank moving swiftly to lower rates as inflation exhibits signs of moderation.

Goldman now predicts a sequence of five consecutive 25 basis point interest rate reductions throughout the year, bringing rates down from the current 5.25% to 4%. Subsequently, it anticipates the Bank settling at a terminal rate of 3% by June 2025.

Goldman Sachs forecasts BOE delaying rate cuts
Goldman Sachs forecasts BOE delaying rate cuts, then implementing quicker reductions amid inflation moderation. 

This contrasts with more conservative market forecasts of three cuts by December 2024. “We continue to think that the BoE will ultimately loosen policy significantly faster than the market expects,” the note stated.

Bank of England Governor Andrew Bailey acknowledged on Tuesday that investors’ bets on interest rate cuts this year were “not unreasonable,” but he refrained from providing a specific timeline. “The market essentially reflects in its curve that we will reduce interest rates during this year,” Bailey remarked to U.K. lawmakers at the Treasury Select Committee.

“We are not predicting when or by how much [we will cut rates]. But I think you can tell from that, that profile of the forecast … that it’s not unreasonable for the market to think about.” The Bank’s Chief Economist Huw Pill also indicated last week that the initial rate cut is still “several” months away.

Goldman analysts attributed the delay to the persistent strength of the British labor market and ongoing wage growth. However, they noted that these pressures were likely to ease in the latter part of the year, with declining inflation indicating a “cooling” trend.

In January, U.K. inflation remained steady at 4% year-on-year, although price pressures in the services sector remained elevated. Meanwhile, the month-on-month headline consumer price index decreased to -0.6% after an unexpected uptick in December.

The U.K. economy faces a potential recession
The U.K. economy faces a potential recession, prompting speculation of aggressive rate cuts by BOE. 

Goldman suggested there was a 25% likelihood that the BOE would postpone rate cuts beyond June if wage growth and services inflation persisted. However, it also indicated an equal likelihood of the Bank implementing more aggressive 50 basis point rate cuts if the economy slides into a “proper” recession.

The U.K. economy entered a technical recession in the final quarter of last year, with preliminary figures showing a 0.3% contraction in gross domestic product. Bailey mentioned on Tuesday, however, that the economy had already displayed signs of improvement.

“There was a lot of emphasis again on this point about the recession, and not as much emphasis on … the fact that there is a strong story, particularly on the labor market, actually also on household incomes,” he remarked.

Nonetheless, he clarified that the Bank does not necessarily need to witness inflation dropping to its 2% target before commencing rate cuts. U.K. government bond yields declined as Bailey addressed lawmakers, indicating heightened investor expectations of rate cuts.

Sajda Parveen
Sajda Parveen
Sajda Praveen is a market expert. She has over 6 years of experience in the field and she shares her expertise with readers. You can reach out to her at [email protected]
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