Goldman Sachs’ new forecasts warn that interest rates may rise above 5 percent and that inflation will not return to Bank of England target of 2 percent for at least three years.
The investment bank is of the opinion that consumer price inflation will continue to be higher for longer, due to high food costs, a robust labour market, and a robust economy.
The Bank of England’s monetary policy, which sets rates of interest, stated this month that there was a high probability of inflation falling to 2% by the middle of the year 2025. Goldman economists, however, said that this milestone would be harder to achieve, and predicted that inflation will reach the target by the beginning of 2026.
Forecasts indicate that the government will achieve its goal of halving inflation by 2023 with a consumer price growth rate of 4.7% in December. The government will meet its target if the inflation rate is at or below 5.3 percent.
Analysts at Barclays predicted that consumer price inflation would fall to 3.2% by the end the year. This is in line with the government’s goal. Jeremy Hunt said he was willing to tolerate a contraction in order to slow down rising prices. Goldman warned of persistently high core inflation. The bank’s analysts revised their forecasts from 5.6% to 6.0% by the end the year.
Sven Jari Stehn is Goldman’s European chief economist. He said: “Resilient economic growth, tight labor markets and persistent inflationary pressures are likely to convince the MPC of the need for additional tightening.” Sven Jari Stehn, Goldman’s chief European economist, said that the MPC will raise interest rates another 0.25 percentage point in June and August. This would bring the base rate up to 5%. He added that the “risks of our terminal rate forecast” are on the upside.
Andrew Bailey the Bank’s governor admitted last week there were “very important lessons” to be learned from the MPC failing to control inflation in the past year. The Bank of England’s governor, Andrew Bailey, admitted last week that there were “very big lessons to learn” from the MPC’s failure to control inflation over the past year.
In April, the headline consumer price inflation was 8.7 percent. This is still higher than Bank forecasts of 8.3 percent. Core inflation increased at its fastest rate in 31 years last month, reaching 6.8 percent. Food price inflation also remained near record levels. Inflation was initially triggered by the surge in global energy costs after the outbreak of war in Ukraine. However, it has now been sustained by domestic pressures such as the escalating cost of goods and food, and strong wage increases.
Goldman warned that food prices would continue to rise because the inflation rate of producers will not fall until the consumer prices do. The report estimates that the average quarterly inflation rate for food will drop from 13.5 percent to 6.7 percent by the fourth quarter. Stehn warned that there was a danger the job market’s strength would continue to drive wage growth high for the remainder of the year.