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Goldman Sachs: The Bank of England is expected to delay interest rate cuts, but the intensity may increase

2024-02-21

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Goldman Sachs' latest forecast suggests the Bank of England may keep interest rates higher for longer before cutting them sharply in the second half of this year.

In a research note released on Tuesday, the Wall Street bank pushed back its rate cut expectations by a month, from May to June, citing "steadiness" in several key inflation measures. But the bank said the central bank may then cut interest rates faster than previously expected as inflation shows signs of cooling.

Goldman Sachs expects five consecutive 25 basis point interest rate cuts this year, lowering interest rates from the current 5.25% to 4%. The final interest rate is expected to reach 3% by June 2025.

In contrast, market expectations are more modest, with three interest rate cuts by December 2024.

"We continue to believe that the Bank of England will ultimately ease policy significantly faster than market expectations," the report said.

Bank of England Governor Bailey said on Tuesday that investors' bets on interest rate cuts this year were "not unreasonable", but he declined to give a timetable.

Bailey told British lawmakers at the Treasury Select Committee: "The market is basically priced in on the curve that we will cut interest rates this year."

"We're not predicting when or how much we're going to cut rates," he added, "but I think you can see from the forecasts... that the market is not unreasonable in thinking about this."

Huw Pill, chief economist of the Bank of England, also said last week that the first interest rate cut is still "a few months" away.

pressure cooling

Goldman Sachs analysts attributed the delay in raising interest rates to the continued strength of the UK labor market and continued wage growth. However, the bank noted that these pressures are likely to weaken in the second half of the year, with falling inflation indicating that these pressures are "cooling."

Although price pressures in the services sector remain high, UK inflation remained stable at 4% in January. Meanwhile, the overall consumer price index fell to -0.6% month-on-month after an unexpected rise in December.

Goldman Sachs said there is a 25% chance that the Bank of England will postpone an interest rate cut until after June if wage growth and service sector inflation remain sticky. However, it also said the BoE was more likely to cut interest rates more aggressively by 50 basis points if the economy fell into a "real" recession.

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

However, Bailey said on Tuesday that the economy was showing signs of improvement.

"It's actually a strong story, particularly in the labor market and actually in terms of household incomes," he said.

Still, he noted that the central bank does not need to see inflation fall to its 2% target before starting to cut interest rates.

British government bond yields fell as Bailey spoke, signaling increased investor expectations for a rate cut.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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Goldman Sachs: The Bank of England is expected to delay interest rate cuts, but the intensity may increase

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