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According to new forecasts from Goldman Sachs, the Bank of England is expected to cut interest rates significantly faster than financial markets currently expect.
Wall Street’s investment bank predicts that the UK base rate could fall to 2.75% in November 2025, driven by continued progress on disinflation and dovish signals from policymakers.
Currently, the UK base rate is 5%, which Goldman Sachs described as ‘remarkably restrictive’. The investment bank’s researchers believe the Bank of England will cut rates more aggressively than is priced in by markets as inflation continues to decline. In contrast, market consensus points to a slower decline, with interest rates expected to remain around 3.5%.
Different opinions about interest rate cuts
Goldman Sachs’ forecasts are in line with those of Deutsche Bank, which also expects faster-than-expected cuts, albeit at a slower pace. Deutsche Bank predicts that the base rate will fall to 3% in February 2026. Meanwhile, financial markets are currently expecting two cuts of 25 basis points by the Bank of England in November and December this year, which will bring the base rate down to 4.5%.
The projections follow a faster-than-expected decline in UK inflation, which fell to 1.7% year-on-year in September from 2.2% in August. This has raised expectations that the Bank of England will ease monetary policy, although views within the Bank’s Monetary Policy Committee (MPC) differ on how quickly to act.
Andrew Bailey, the Bank’s governor, has suggested the MPC could be more aggressive in cutting rates if inflation stabilizes, while Huw Pill, the Bank’s chief economist, favors a more gradual approach. The panel’s upcoming discussions at the International Monetary Fund meetings in Washington are expected to provide further insights into the Bank’s strategy.
Balancing economic pressure
The challenge for policymakers is to determine the ‘neutral interest rate’ – the interest rate that neither stimulates nor restricts economic activity. Goldman Sachs estimates neutral interest rates in Britain at 2.75%, up from negative real interest rates after the global financial crisis. After taking inflation into account, they estimate the real neutral interest rate to be around 0.8%, in line with historical averages.
However, determining this rate is complicated. The UK economy faces a unique mix of factors, including slow productivity growth, rising government debt and an aging population, all of which weigh on its long-term economic potential. The country’s debt-to-GDP ratio has risen from 35% in 2007 to almost 100%, the highest level since the 1960s, putting further pressure on the economy.
In addition, Chancellor Rachel Reeves is expected to increase borrowing in the coming autumn budget to finance government investment, a move that analysts say is unlikely to cause the kind of market instability caused by former Prime Minister Liz Truss’s tax cuts last year. Reeves’ approach is expected to focus on investments that can boost long-term growth, rather than short-term budget concerns.
Uncertainties surrounding neutral interest rates
Central bankers often use estimates of the neutral interest rate to guide monetary policy, but these estimates are subject to significant uncertainty. A miscalculation could lead to rates that are either too high, limiting economic growth, or too low, fueling inflation. Goldman Sachs noted that while the Bank of England has indicated a neutral rate of around 2-2.5%, it remains cautious about placing too much weight on this estimate.
As the Bank of England deals with these uncertainties, the debate over how quickly to cut rates will be determined by changing economic data, particularly inflation trends and global economic conditions. With interest rates potentially falling to 2.75% next year, businesses and consumers alike will be keeping a close eye on how the Bank of England responds to the changing economic landscape.