Goldman Sachs predicts a significant drop in UK interest rates by November 2025.
- UK’s base rate may fall from the current 5% to 2.75%, as inflation eases.
- The forecast highlights more aggressive rate cuts than market expectations.
- There are divergent views within the Bank of England on the rate of monetary easing.
- Chancellor Rachel Reeves’ Autumn Budget is expected to prioritise long-term growth investments.
Goldman Sachs has forecasted a substantial decline in the United Kingdom’s interest rates, predicting that the base rate could reach as low as 2.75% by November 2025. This projection comes amidst ongoing progress in disinflation and dovish policy signals. Presently, the base rate stands at a notably restrictive 5%, reflecting a stringent monetary stance as inflation shows signs of easing. The investment bank suggests that the Bank of England will implement rate reductions more aggressively than current market pricing indicates, which anticipates a slower decrease with rates stabilising around 3.5%.
Goldman Sachs’ insights are consistent with Deutsche Bank’s expectations of faster-than-anticipated cuts, albeit at a slower pace. Deutsche Bank projects the base rate to decrease to 3% by February 2026. The market currently foresees two 25 basis point reductions by the Bank of England in the concluding months of this year, lowering the rate to 4.5%. This perspective emerges in light of a swifter-than-expected decline in UK inflation, plummeting to an annual rate of 1.7% in September from 2.2% in August, which has amplified expectations for the Bank to ease monetary policy.
However, internal opinions diverge within the Bank of England’s Monetary Policy Committee (MPC) on the pace of easing. While Governor Andrew Bailey implies the MPC could adopt a more aggressive lowering of rates if inflation stabilises, Chief Economist Huw Pill advocates a more cautious approach. The upcoming discussions during the International Monetary Fund meetings in Washington are anticipated to provide additional insight into the Bank’s strategic direction.
Determining the ‘neutral interest rate’—a rate that neither stimulates nor restrains economic activity—poses a challenge for policymakers. Goldman Sachs estimates this neutral rate for the UK to stand at 2.75%, marking an increase from the negative real-term rates post-global financial crisis. Adjusted for inflation, the real neutral interest rate is estimated at approximately 0.8%, aligning with historical averages. Nevertheless, calculating this rate is complex due to distinct economic factors such as sluggish productivity growth, rising public debt, and an ageing populace impacting long-term economic potential.
The nation’s debt-to-GDP ratio has escalated significantly, surging from 35% in 2007 to almost 100%, the highest since the 1960s, exerting additional economic pressure. Chancellor Rachel Reeves is expected to enlarge borrowing in the forthcoming Autumn Budget to fund public investments, a strategy unlikely to evoke market instability akin to last year’s tax cut controversy. Analysts believe Reeves will prioritise investments that enhance long-term growth over immediate fiscal incentives. Calculations of the neutral rate are crucial as they guide monetary policy, though they are marked by substantial uncertainty. An error in these calculations might result in rates that either stifle economic expansion or incite inflation. Goldman Sachs cautions that although the Bank of England suggests a neutral rate around 2-2.5%, it remains wary of over-relying on this estimate.
The evolving economic landscape necessitates close observation of the Bank of England’s responses to shifting monetary dynamics.
