Goldman Sachs says the Bank of England is likely to cut interest rates later, but more significantly

The Bank of England is likely to keep interest rates high for longer before cutting them more sharply than expected in the second half of the year, according to new forecasts from Goldman Sachs.

In a research note issued Tuesday, the Wall Street bank pushed back its interest rate cut expectations by one month, from May to June, citing several key inflation indicators that are “on the firmer side.”

But he said the central bank was likely to cut interest rates more quickly than previously expected as inflation showed signs of slowing.

Goldman now expects five consecutive 25 basis point rate cuts this year, bringing interest rates down from the current 5.25% to 4%. It then sees the bank stabilizing at a final rate of 3% in June 2025.

This compares with more moderate market expectations of three cuts by December 2024.

“We continue to believe that the Bank of England will ultimately ease policy much faster than the market expects,” the note said.

Bank of England Governor Andrew Bailey said on Tuesday that investors' bets on interest rate cuts this year were “not unreasonable”, but he resisted giving a timetable.

“The market is basically embodying on the curve that we will cut interest rates over the course of this year,” Bailey told British lawmakers on the Treasury Select Committee.

“We don't predict when or how much [we will cut rates]”But I think you can tell from that outlook profile… that it's not unreasonable for the market to think about it,” he continued.

The bank's chief economist, Hugh Bell, also said last week that the first interest rate cut was still “several” months away.

Goldman Sachs analysts attributed their delay to the continued strength of the British labor market and continued wage growth. However, he noted that these pressures are likely to subside in the second half of the year, with lower inflation indicating that “a cooling is underway.”

UK inflation stabilized at 4% year-on-year in January, although price pressures in the services industry remained hot. Meanwhile, the headline CPI fell month-on-month to -0.6% after recording a surprise rise in December.

Goldman said there was a 25% chance the Bank of England would postpone interest rate cuts beyond June if wage growth and services inflation remained steady. However, he also said there was an equal chance the bank would cut interest rates by 50 basis points if the economy slipped into a “favorable” recession.

Preliminary figures showed on Thursday that the British economy slid into a technical recession in the last quarter of last year, with the gross domestic product shrinking by 0.3%.

But Bailey said Tuesday that the economy is already showing signs of improvement.

“There was a lot of focus again on this point about the recession, and not as much focus on the fact that there was a strong story, particularly in the labor market, and actually also on household incomes,” he added.

However, he noted that the bank does not need to see inflation fall to its 2% target before it begins cutting interest rates.

UK government bond yields fell as Bailey spoke, indicating increased investor expectations for interest rate cuts.