29th Jan 2025 - Article appears in MSN by Ed Magnus

UK interest rates will fall faster and further than markets expect, two giant US banks predict

The Bank of England is likely to cut interest rates far further and faster than markets currently expect, two giant US banks forecast.

Morgan Stanley predicts UK interest rates to fall to 3.5 per cent by the end of this year, while Goldman Sachs says interest rates will fall to 3.25 per cent by June next year. 

Currently, markets are pricing in only two or three rate cuts this year with the base rate expected to fall from 4.75 per cent to 4 per cent. 

But analysts at both US banks are sceptical of this general consensus that has been all but priced in financial markets.

They believe that the UK economy will struggle over 2025 forcing the Bank of England to take action and cut rates more aggressively.

Both banks say lower GDP growth will be exacerbated by a slowdown in household disposable incomes.

Goldman Sachs sees further pressure coming from rising trade tensions.

As a result, both expect growth of only 0.9 per cent in 2025 - below the Bank of England's 1.5 per cent and the OBR's 2 per cent forecasts, as well as the market consensus of 1.3 per cent. 

Analysts at the Wall Street giants believe the Bank of England will cut more sharply than suggested by current market pricing

Analysts at both banks also think interest rates will be cut further and faster than expected because the labour market is weakening. They point to negative employment effects from the upcoming National Insurance  increase as well as HMRC’s payroll data showing a continued decline in employment.

Morgan Stanley's report states: 'We still expect the cut in February, and bank rate at 3.5 per cent by year-end. We now expect cuts in February, May, June, August and November.'

Analysts at Goldman Sachs also point out that some MPC members are already calling for lower rates to avoid an inflation undershoot given weakening demand across the economy.

Its report states: 'A cut on 6 February is very likely and largely priced by financial markets. 

'But we believe that markets are pricing too few rate cuts beyond that relative to our bank rate forecast of 3.25 per cent in the second quarter of 2026. 

'While it is possible that the Bank of England will slow the pace of cuts if underlying inflation fails to make progress (20 per cent probability), we believe that a step-up to a sequential pace of cuts in response to weaker demand is actually more likely (30 per cent odds).

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