Goldman Sachs Predicts
UK Interest Rate Drop to 2.75%

Goldman Sachs has forecast that UK interest rates could fall to 2.75% by autumn 2025, predicting that the Bank of England will reduce rates at each of its next nine meetings. This projection is notably more aggressive than current market expectations, which anticipate a slower pace of rate cuts. If accurate, this would provide significant relief to UK mortgage borrowers, many of whom have been struggling under the burden of high monthly repayments due to the elevated rates of recent years.

The investment bank's economists base their prediction on the concept of the long-term neutral interest rate, which is the rate consistent with stable inflation and full employment, also known as the “r*.” Goldman Sachs estimates that this rate sits around 0.75%, which, when paired with the Bank of England's 2% inflation target, translates into a nominal interest rate of around 2.75%. This substantial drop would mark a significant shift from the current interest rate of 5%, a level implemented by the Bank of England to combat surging inflation (The Independent).

Faster Rate Cuts Predicted than Markets Expect

Goldman Sachs' projections indicate that financial markets may be underestimating the extent of potential interest rate cuts. According to the bank, the Bank of England will react more quickly to falling inflation than markets currently anticipate. As inflation continues to ease, this will create room for more aggressive monetary policy adjustments. Recent inflation data supports this view, with goods prices now rising at just 1.7% per year, below the Bank's 2% target (XTB.com).

Goldman Sachs' economists further suggest that dovish commentary from Bank of England policymakers points to an inclination toward easing borrowing costs. This contrasts with some market estimates, which predict that rates will dip more moderately, reaching around 3.75% by November 2025. However, if Goldman Sachs' forecasts are accurate, borrowers could see rates fall to as low as 2.75% by autumn 2025, significantly reducing the cost of mortgages and other loans.

Impact on Mortgage Borrowers and Savers

For mortgage borrowers, this forecast offers a glimmer of hope after enduring several years of high interest rates. Many UK homeowners have faced rising monthly payments as the Bank of England raised its base rate to combat inflation. A reduction in rates could alleviate some of this financial pressure, making it easier for borrowers to manage their mortgage repayments.

However, the outlook is less positive for savers. As interest rates fall, returns on savings accounts are likely to shrink, reducing the income generated from interest-bearing deposits. Those relying on savings for income, particularly retirees, could feel the negative effects of these cuts. Lower rates may also reduce the attractiveness of saving over spending, potentially shifting consumer behavior toward increased spending in the economy.

Factors Influencing Rate Cuts

Beyond easing inflation, Goldman Sachs has identified several additional factors that could keep interest rates lower for an extended period. One of the most significant of these is slow productivity growth, which limits the economy's ability to expand and keeps inflationary pressures at bay. Falling prices for capital goods, such as machinery and equipment, are also contributing to lower inflation, further justifying the forecast for rate cuts (XTB.com).

However, the forecast is not without risks. While inflation may be easing, Goldman Sachs has also noted that rising public debt and population growth could place upward pressure on borrowing costs, preventing rates from dropping to their lowest historical levels. "While inflation is easing and providing a basis for rate cuts, these structural economic challenges mean that interest rates are unlikely to drop to the very low levels seen in previous years," the investment bank said. (XTB.com).

Bank of England’s Response

The Bank of England previously raised interest rates to a peak of 5.25% in an effort to rein in runaway inflation. While this policy helped stabilize inflation, it also led to higher mortgage costs for millions of homeowners across the UK. Goldman Sachs' prediction suggests that with inflation slowing faster than expected, the Bank of England may pivot toward a series of aggressive rate cuts to stimulate the economy.

If the Bank of England follows through on Goldman Sachs’ forecast, mortgage borrowers across the UK could soon see their financial situation improve. Lower interest rates would reduce the cost of borrowing, offering relief to those with variable-rate mortgages or those looking to remortgage in the near future.

As 2025 approaches, both borrowers and savers will be closely watching the Bank of England's decisions on interest rates. For borrowers, the hope is that rates will fall quickly, as predicted by Goldman Sachs. However, for savers, the outlook is less optimistic, as falling rates could result in lower returns on their deposits. In either case, the economic landscape appears poised for significant change over the next year.