Bank of England Expected to Implement Larger Rate Cuts, Predicts Goldman Sachs

The Bank of England is projected to maintain higher interest rates for a longer period before implementing more substantial rate cuts later in the year, according to recent forecasts by Goldman Sachs. The Wall Street bank, in a research note released on Tuesday, adjusted its expectations for rate cuts from May to June, citing several key inflation indicators which are “on the firmer side.” However, it also highlighted the likelihood of more rapid rate reductions than previously anticipated as inflation begins to cool down.

Goldman Sachs now foresees a total of five consecutive 25 basis point interest rate cuts in 2024, which would lower rates from the current 5.25% to 4%. The bank expects the Bank of England to settle at a terminal rate of 3% by June 2025. This projection differs from the more moderate market expectations of three cuts by December 2024.

“We continue to think that the BoE will ultimately loosen policy significantly faster than the market expects,” the research note stated. Bank of England Governor Andrew Bailey acknowledged that investors’ bets on interest rate cuts this year were not unreasonable but refrained from providing a specific timeline. Bailey emphasized that the market’s anticipation of rate reductions throughout the year was a reasonable assumption.

Goldman analysts attributed the delay in rate cuts to the ongoing strength of the British labor market and sustained wage growth. However, they also indicated that these pressures are likely to subside in the latter half of the year, as lower inflation indicates a cooling trend.

UK inflation remained steady at 4% year-on-year in January, although the services sector experienced persistent price pressures. On the other hand, the month-on-month headline consumer price index recorded a decrease of -0.6%, following a surprising uptick in December.

Goldman Sachs outlined a 25% likelihood that the Bank of England would postpone rate cuts beyond June if wage growth and services inflation remained stubborn. However, they also highlighted a similar probability of the Bank implementing a more aggressive 50 basis point cut if the economy enters a “proper” recession.

Preliminary figures revealed that the UK economy slipped into a technical recession in the final quarter of 2023, with a 0.3% contraction in gross domestic product (GDP). Nevertheless, Bailey stated that the economy has already shown signs of a rebound.

While the Bank does not require inflation to reach its 2% target before initiating rate cuts, Bailey’s comments resulted in a decline in UK government bond yields, indicating increased investor expectations of impending rate reductions.

For more economic news and analysis, visit Business Today.