Bank of England rate cuts likely later but larger, Goldman Sachs says

Bank of England rate cuts likely later but larger, Goldman Sachs says

Blurred buses drive past the Bank of England in the City of London on February 7, 2024 in London, United Kingdom.

Mike Kemp | In pictures | Getty Images

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

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

However, it said the central bank would then likely cut interest rates faster than previously expected as inflation shows signs of cooling.

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

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

“We continue to expect that the BoE will ultimately ease policy significantly more quickly than the market expects,” the statement said.

Bank of England Governor Andrew Bailey said on Tuesday that investors’ bets on interest rate cuts this year were “not unreasonable” but declined to give a timetable.

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

“We make no prediction as to when or up to how much [we will cut rates]”, he continued. “But I think you can see from this profile of the forecast that it’s not unreasonable for the market to think about.”

The bank’s chief economist Huw Pill also said last week that the first rate cut was still “a few” months away.

Cooling is in progress

Goldman analysts attributed their delay to the continued strength of the UK labor market and ongoing wage growth. However, it noted that these pressures are likely to ease in the second half of the year as lower inflation suggests a “cooling is underway”.

UK inflation remained stable at 4% year-on-year in January, although price pressures remained high in the services sector. Meanwhile, the consumer price index fell to -0.6% month-on-month after posting a surprise rise in December.

Goldman said there was a 25 percent chance the BOE would delay rate cuts beyond June if wage growth and services inflation remained stable. However, there is also a chance that the bank could cut interest rates by a more aggressive 50 basis points if the economy slides into a “real” recession.

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

However, Bailey said Tuesday that the economy had already shown signs of recovery.

“This point of the recession has again been heavily emphasized and not so much emphasized… the fact that there is a strong story, particularly in the labor market, actually in household income as well,” he said.

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

British government bond yields fell as Bailey spoke, suggesting investor expectations of interest rate cuts have increased.

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2024-02-20 14:59:06