A leading investment bank predicted that interest rates will fall to 2.75 percent by the autumn of next year after the Bank of England lowers the cost of borrowing in each of the nine meetings it holds.
The economists at Goldman Sachs stated that the markets underestimated the likely impact of Threadneedle Street’s nine-strong MPC’s actions.
The US lender stated in a research report that “our findings suggest that Bank Rate remains notably restrictive and that – along with rapidly falling inflation, and dovish MPC comments – reinforces the view that the Bank of England is likely to lower rates much more than expected.”
We are comfortable with our forecast of consecutive 0.25-point reductions and have lowered our Bank Rate terminal forecast to 2.75% by November 2025, down from 3% in September. This is a significant drop below the current market pricing.
The financial markets believe that there is 98% probability of the Bank reducing rates from 5 next month to 4.75% and that borrowing costs are likely to continue falling, down to 3.75% by November 2025.
Andrew Bailey, Bank of Canada’s Governor, fueled speculation that the MPC will accelerate the rate cut pace when he said this month that a more “aggressive approach is possible.
Goldman Sachs’ view on the future of interest rates is based on the estimate of r* – the neutral real interest rate that is neither expanding nor contracting while the economy is full employment and inflation is at target.
The analysis concluded that the r* trend had been down in recent decades, and has risen modestly since the Covid-19 pandemic began. Goldman’s estimates indicate that r* is around 0.75%. This implies a nominally neutral rate of approximately 2.75% when inflation is at the 2% goal.
Separate research from economists at Deutsche Bank stated that policy is currently restrictive. They predicted the Bank will respond to the slowing economy, a weaker growth in pay and an ease in inflation for the service sector by cutting rates each of the MPC meetings next month until May 2025.
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