Goldman Sachs forecasts that the Bank of England will cut interest rates faster than investors expect over the next 12 months.
Researchers from the Wall Street Investment Bank said that UK’s real underlying interest rate has increased to 2,75 percent since the Covid-19 Pandemic. This is well above the negative level in real terms seen during the decade following the global financial crises. Goldman Sachs estimates that after accounting for inflation the real “neutral” interest rate is now 0.8 percent, which is in line with its historic average since 1870.
Goldman Sachs stated that UK base rate at its current level of 5% “remains notably restrictive”. The bank added that the Bank of England will “ultimately lower rates more than the financial markets have priced in given continued progress towards disinflation, and recent dovish comments”.
Goldman Sachs stated that “we forecast sequential Bank rates cuts up to a terminal level of 2.75 percent in November 2025… significantly below current market prices.”
The analysts at Deutsche Bank, Germany’s investment bank, stated on Monday that, like Goldman Sachs, they believe the Bank of England is likely to cut rates more quickly than originally expected. However, this will be slower than Goldman Sachs, who predicted the base rate would fall to 3% by February 2026.
The financial markets believe that the Bank of England will loosen its monetary policy during the next two meetings. However, they also think that or the base rate, in the long run, will be around 3.5 percent, which is much higher than Goldman Sachs’ estimates.
Inflation dropped faster than Bank of England had expected in the last month . It was 1.7 percent in September compared to 2.2 percent in August. The Bank of England closely monitors the services inflation rate, which has dropped from 5.6 to 4.9 percent.
The cap on energy prices is expected to increase CPI inflation in the last months of the year. The Bank of England is expected to reduce the base rate by 25 basis points at its November and December meetings.
The Bank of England’s monetary committee, the nine-person panel that meets six times a year to determine interest rates, has a variety of opinions on how to deal with inflation and the pace of easing monetary policies.
Andrew Bailey, Bank of England governor, hinted at the possibility that the MPC would be “aggressive”, lowering interest rates, if data confirmed the stabilisation of inflation. Huw Pill expressed his preference for , a gradual reduction in interest rates.
Bailey and MPC members are expected to participate in a number of panel discussions during the meeting of world finance ministers this week at the International Monetary Fund, Washington. Their comments will likely provide clues as to how long monetary policy is expected to remain restrictive.
Goldman Sachs stated: “While slow productivity growth, falling capital goods prices and population ageing are likely to continue to weigh on [neutral rates] in the UK. Sharply rising public debt, and a pickup in population growth is likely pushing the opposite.”
In the UK, debt-to GDP ratios have risen to their highest levels since the 1960s. Over the same period, the contribution of GDP growth to productivity growth fell sharply. This weakened the economy’s fundamental strength.
Rachel Reeves is expected to increase borrowing at the budget to fund an increase in public investment expenditure on October 30. Analysts believe that borrowing for investment can boost growth and is unlikely to cause a Liz Truss style bond market crash. Former prime minister Liz Truss raised borrowing to fund £45 billion in tax cuts.
The so-called neutral rate of interest is often used by policymakers to guide their decisions. This rate does not stimulate growth beyond its capacity and therefore inflation, nor does it constrain economic activity.
Due to frequent changes in consumer and business behaviour, it is difficult to determine the neutral rate of interest. Central bankers are at risk of either raising borrowing costs or keeping them low, if their decisions are based on unreliable neutral interest rates.
Goldman Sachs stated: “The uncertainty surrounding these estimates is extremely large. However, this is consistent with BoE caution when it comes to placing too much emphasis on the neutral interest rate for practical policy purposes.”
Bank of England estimated the neutral rate of the UK to be between 2 and 2.5 percent.
Post Disclaimer
The following content has been published by Stockmark.IT. All information utilised in the creation of this communication has been gathered from publicly available sources that we consider reliable. Nevertheless, we cannot guarantee the accuracy or completeness of this communication.
This communication is intended solely for informational purposes and should not be construed as an offer, recommendation, solicitation, inducement, or invitation by or on behalf of the Company or any affiliates to engage in any investment activities. The opinions and views expressed by the authors are their own and do not necessarily reflect those of the Company, its affiliates, or any other third party.
The services and products mentioned in this communication may not be suitable for all recipients, by continuing to read this website and its content you agree to the terms of this disclaimer.