Goldman Sachs has forecast that the Bank of England will cut interest rates to 2.75% by autumn 2025, with reductions at each of its next nine meetings. The investment bank argues that markets are underestimating the extent of monetary easing needed, as the current Bank rate remains restrictive amid rapidly falling inflation.
In a research note, Goldman Sachs stated: 'Our findings suggest that Bank rate remains notably restrictive and – together with rapidly falling inflation and dovish MPC commentary – reinforces our view that the Bank of England will ultimately lower rates more than priced.' The bank now expects a terminal rate of 2.75% in November 2025, down from a previous forecast of 3%.
Financial markets currently price a 98% chance of a rate cut from 5% to 4.75% next month, with further reductions to 3.75% or lower by November 2025. Bank of England Governor Andrew Bailey has fuelled speculation of faster cuts, telling the Guardian that a more 'aggressive' approach is possible.
Goldman's analysis is based on its estimate of r*, the neutral real rate of interest, which it calculates at about 0.75%. This implies a nominal neutral rate of 2.75% with inflation at the 2% target. Separately, Deutsche Bank predicts rate cuts at each of the next five MPC meetings through May 2025, bringing rates to 3.75%.
