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Interest rates will fall to 2.75 percent over the next year, benefiting millions of borrowers, Goldman Sachs has predicted.
Economists at the Wall Street giant believe the Bank of England will make sharper cuts than market prices, which point to a drop in rates to 3.5 percent, suggest.
Goldman’s forecast would mean an interest rate cut of a quarter point at all nine meetings of the Bank’s Monetary Policy Committee (MPC) between November 2024 and November 2025.
Rate Expectations: Economists at Goldman Sachs believe the Bank of England will make sharper cuts than market prices suggest, which point to rates falling to 3.5%.
The Bank of England raised interest rates from 0.1 percent at the end of 2021 to 5.25 percent in the summer of 2023 as it struggled to control double-digit inflation.
But inflation has been at or around its 2 percent target for six months, and in September it fell below that level to 1.7 percent, its lowest level in three and a half years. The Bank cut rates in August to 5 percent.
But it has come under pressure to go faster, especially after the U.S. Federal Reserve announced a half-percentage-point cut last month, while the European Central Bank has carried out three quarter-point cuts this year. .
Goldman’s latest UK prediction is based on its calculation of the “neutral” interest rate at which the economy can balance between low unemployment, on the one hand, and inflation at its 2 percent target. , on the other.
By that measure, the Bank’s current interest rate is “notably restrictive,” the analysis maintains.
That means interest rates are still working to restrain economic growth and crush inflation, even though inflation has now fallen below 2 percent.
In a note to clients, Goldman said its analysis “thus reinforces our view that the Bank of England will ultimately cut rates more than financial markets estimate, given continued progress on disinflation.”
He also noted “recent moderated comments.” This is likely a reference to comments by Bank of England Governor Andrew Bailey, who said he could be “a little bit more aggressive” in cutting rates if inflation remains under control.
However, other expressions by those who set the Bank’s rates have been noticeably more cautious.
In a column for the Financial Times yesterday, MPC member Megan Greene said the strength of consumer spending – a key factor in calculating how quickly to cut rates – remained uncertain.
“Given these risks, I believe a cautious and gradual approach to monetary easing is appropriate,” he said.
Steven Bell, chief economist at Columbia Threadneedle Investments, shares Goldman’s optimism about the pace of rate cuts, although he doesn’t think they will fall that quickly.
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