Economists at Goldman Sachs have predicted that the UK could see the base rate start to fall from February or March next year.
The investment bank made the prediction in a note to clients that the Bank of England could cut interest rates in the first quarter of next year.
Earlier this month, the Bank of England’s Monetary Policy Committee (MPC) held the base rate at 5.25% for the second time in a row, after 14 consecutive rate hikes.
Outlining various scenarios, Goldman Sachs economists put a 15% probability on the first interest rate cut coming in the first three months of next year, with rates then falling rapidly to 3.5% by the end of the year.
But said it was more likely (30% probability) that the rate fall, from 5.25% to 5%, would come in the third quarter, with a second cut to 4.75% later in the year.
The research note read: “The MPC is very likely to hold bank rate again at the December meeting… That said, earlier cuts are possible if the economy turns out weaker than expected.”
‘Moving in the right direction’
However, Megan Greene, a member of the Bank of England’s Monetary Policy Committee (MPC), said financial markets globally “haven’t really clocked” that rates will need to remain “restrictive” for some time. She said that although inflation is falling, it would be a “tougher slog” to bring it down to the bank’s 2% target.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said: “One sure way to fire markets up would be a definitive course of action on interest rates. In the absence of certainty though, markets only have maybes to go on. And the latest suggestion from Goldman Sachs suggests that interest rate cuts could be coming in the new year and will brighten up February.
“There has been some concern over when the Bank of England will start snipping the tightropes of monetary policy, given that there is still some residual heat in the economy. Policymakers are insisting that loosening isn’t on the cards just yet, but things have been moving in the right direction which opens up the possibility of a policy shift in the coming months.”
Earlier this week, investment bank Morgan Stanley said it expects the Bank of England to cut interest rates as soon as May and noted that the base rate could fall to 4.25% by the end of next year.
