Goldman Sachs expects UK interest rates to fall to 3% next year to give borrowers a boost

Goldman Sachs has predicted that UK interest rates will fall to 3 per cent by this time next year, providing a major boost to millions of borrowers.

Experts at the Wall Street investment bank believe the Bank of England will “reconsider its cautious approach” and accelerate the pace of rate cuts later this year.

The Bank cut its benchmark rate last month for the first time since 2020 but is widely expected to leave it unchanged at 5 percent when policymakers meet next week.

Markets are betting on two more cuts by the end of this year, but few believe the Bank’s Monetary Policy Committee will proceed as aggressively as Goldman predicts.

In a note to clients, Goldman forecast that rates would be cut to 3% in September 2025, with the cycle starting in November. That implies a quarter-percentage point rate cut at each meeting during that period.

The Bank of England took a cautious stance on rate cuts earlier this year.

This was due to concerns about continued high wage growth and inflation in the services sector, concerns that are now easing, according to Goldman Sachs.

James Moberly, an economist at the bank, wrote: “We see compelling reasons for the Monetary Policy Committee to accelerate the pace of easing as wage pressures moderate and core services inflation recedes.”

The broader market is predicting a slower path, with rates at 3.5 percent next September and falling to 3.25 percent by the end of 2025. Deutsche Bank expects rates to hit 3 percent in the summer of 2026.

Goldman’s report came after a Bank of England survey found that public inflation expectations for next year have fallen to their lowest level in three years.

The survey conducted last month found that the public’s inflation expectations for the next 12 months fell to 2.7 percent, the lowest level since August 2021. Inflation now stands at 2.2 percent and is not expected to change when the latest figures are published next week.

But the Bank closely monitors public expectations about price pressures, as they can create their own momentum: if workers think prices are soaring, they will demand steeper wage increases, potentially fuelling further inflation.

In the United States, the Federal Reserve is expected to cut rates by at least a quarter of a percentage point next Wednesday, with speculation that it could even go as far as a whopping half-point increase. Meanwhile, the European Central Bank cut rates this week for the second time this year.

Santander yesterday became the first major British bank to offer a two-year fixed-rate mortgage with an interest rate below 4%. It announced that a two-year purchase product with an interest rate of 60% to 3.99% will be available from Tuesday.

Traders are anticipating further rate cuts next week as lenders scramble to reprice their operations in a bid to attract new borrowers.

Craig Fish of Lodestone Mortgages said: “This is an aggressive price and will really give it an edge over the competition.”