A sputtering economy could drive mortgage rates substantially down
Last week, Mortgage Introducer reported that inflation had fallen more than expected, and that the Bank of England was facing pressure to cut rates more aggressively. And now a global bank has predicted that the Bank of England might implement up to six interest rate cuts by the middle of next year as it grapples with sluggish economic activity, The bank has also forecast that UK interest rates could fall to 3.25% by the second quarter of next year, a significant reduction from current levels.
In its latest analysis, global investment bank Goldman Sachs stated, “We believe that markets are pricing too few rate cuts. While it is possible that the Bank of England will slow the pace of cuts if underlying inflation fails to make progress, we believe that a step-up to a sequential pace of cuts in response to weaker demand is actually more likely.”
While financial markets are currently expecting just two interest rate cuts in 2025, many experts suggest that policymakers will move more aggressively. It makes sense to cut rates pre-emptively to take out a little insurance against this change in the balance of risks,” rate setter Alan Taylor said last week.
Read more: Is a rate war going to drive mortgages below 4%?
Economists predict the Bank will lower rates by 0.25% at its next meeting on February 6, followed by further reductions in each quarter of the year. This would mirror the pattern seen last year when rates were reduced twice, dropping from 5.25% to 4.75%.
Goldman Sachs highlighted that disappointing economic growth figures could prompt the Bank of England to accelerate monetary easing. Data released by the Office for National Statistics showed GDP grew by just 0.1% in November, below economists’ expectations. Meanwhile, services inflation fell significantly in December, dropping to 4.4%.
The weakening labour market has added further challenges for policymakers. Surveys conducted among private sector businesses point to deteriorating conditions following the government’s autumn budget, which introduced higher employer taxes. Unemployment has risen to 4.4%, and job vacancies are at their lowest since mid-2021, underscoring the impact of reduced hiring activity.
Goldman analysts explained, “While some of this weakness is likely related to expectations for a negative employment effect from the upcoming national insurance increase, we now see notable signs of underlying cooling, which should weaken pay pressures over time.”
Taylor, the newest member of the Bank of England's monetary policy committee, indicated last week that he supports decisive action to stabilise the economy. He mentioned being comfortable with the idea of cutting rates five or six times to achieve what he described as “a soft landing” and to restore interest rates to a more sustainable level.
