The Bank of England is likely to reduce interest rates more sharply and swiftly than the markets currently anticipate, according to forecasts from two major US banks.
Morgan Stanley predicts that UK interest rates will drop to 3.5 per cent by the end of this year, while Goldman Sachs forecasts a reduction to 3.25 per cent by June of next year.
At present, markets are expecting only two or three rate cuts this year, with the base rate anticipated to decrease from 4.75 per cent to 4 per cent. However, analysts at both Morgan Stanley and Goldman Sachs are not in agreement with this general consensus, which has already been factored into financial markets.
These analysts argue that the UK economy will face significant challenges throughout 2025, prompting the Bank of England to act more aggressively and implement steeper rate cuts.
Both banks suggest that slower economic growth, coupled with a decline in household disposable incomes, will weigh heavily on the economy.
Goldman Sachs also points to rising trade tensions as a contributing factor to the country’s economic struggles.
Consequently, both US banks predict growth of only 0.9 per cent in 2025—well below the Bank of England’s 1.5 per cent forecast, the Office for Budget Responsibility’s (OBR) 2 per cent estimate, and the market consensus of 1.3 per cent.
Analysts at both banks also anticipate that interest rates will be reduced more significantly and quickly than expected, primarily due to a weakening labour market.
They highlight the potential negative impact on employment from the forthcoming National Insurance increase, as well as data from HMRC’s payroll reports, which show a continued decline in employment figures.
According to Morgan Stanley’s latest report: “We still expect the cut in February, and for the bank rate to be at 3.5 per cent by year-end. We now expect cuts in February, May, June, August, and November.”
Analysts at Goldman Sachs have also pointed out that a growing number of members on the Monetary Policy Committee (MPC) are now calling for interest rates to be lowered. Their reasoning behind this shift is the concern over avoiding an inflation undershoot, especially as demand across the economy continues to weaken. They believe that a reduction in rates could help to manage the risk of inflation falling too low, which could present further challenges for economic growth.
The report from Goldman Sachs further states, “A cut on 6 February is very likely and largely priced by financial markets.” This suggests that markets have already accounted for a reduction in the upcoming decision, reflecting widespread expectations. However, the analysts argue that markets may be underestimating the pace of future rate cuts. They believe that the financial markets are pricing in too few cuts beyond the initial move and that their forecast of a bank rate at 3.25 per cent by the second quarter of 2026 is more in line with the economic realities that lie ahead.
Goldman Sachs goes on to emphasise that while there is a possibility the Bank of England could slow the pace of cuts if inflation fails to make meaningful progress—an outcome that they assign a 20 per cent probability to—the analysts consider it more likely that the Bank will accelerate the rate cuts. They attribute this higher probability (30 per cent) to the weakening demand that is expected to persist, putting more pressure on the economy to adopt a more aggressive stance on rate cuts in order to stimulate activity and prevent inflation from stagnating.
Analysts at Goldman Sachs have noted that a growing number of members on the Bank of England’s Monetary Policy Committee (MPC) are now calling for interest rate reductions. This shift in sentiment is largely driven by concerns over the potential for inflation to undershoot its target, especially as demand throughout the economy continues to weaken. The analysts believe that lowering rates could help mitigate the risk of inflation falling too low, which would create further challenges for economic growth.
According to Goldman Sachs’ report, “A cut on 6 February is very likely and largely priced by financial markets.” This indicates that the financial markets have largely anticipated a rate reduction in the upcoming decision, with widespread expectations already factored in. However, the analysts caution that markets may be underestimating the pace at which future rate cuts will occur. They argue that the financial markets are pricing in fewer rate cuts beyond the initial reduction and assert that their own forecast—of a bank rate reaching 3.25 per cent by the second quarter of 2026—better aligns with the economic challenges that are likely to unfold.
The Goldman Sachs report continues by highlighting that, although there is a chance the Bank of England could slow the rate cuts if inflation does not show significant progress—an outcome they assign a 20 per cent probability to—they consider it more likely that the Bank will actually accelerate the pace of rate cuts. The analysts attribute a 30 per cent probability to this scenario, driven by the ongoing decline in demand, which they believe will place additional pressure on the economy. This could lead to the Bank adopting a more aggressive approach to rate cuts in an attempt to stimulate economic activity and prevent inflation from stagnating at lower levels.
If the forecasts made by Morgan Stanley and Goldman Sachs come to fruition, savings rates are expected to take a significant hit.
Currently, with the base rate set at 4.75 per cent, the best easy-access savings rates are ranging between 4.5 per cent and 4.75 per cent, while the best fixed-rate deals are similarly aligned. For example, the top one-year fixed-rate deal is offered by Vida Bank at 4.77 per cent.
However, if interest rates were to fall by 1.25 percentage points and drop to 3.5 per cent by the end of this year, it is likely that savings deals across the board will reflect this reduction. Andrew Hagger, a personal finance expert at Moneycomms, predicts that this would be mirrored in the savings market, with easy-access and one-year fixed rates dropping to around the 3.5 per cent mark.
Hagger adds, “As for longer-term fixed rates, it depends on the economic outlook at the end of 2025.” This uncertainty around long-term fixes highlights how changes in economic conditions could influence savings rates over a longer period.
James Blower, founder of The Savings Guru, believes the impact could be even more severe for those holding their money in easy-access savings accounts. He warns, “If they are correct, then we are looking at easy-access best buys falling to around 3 or 3.25 per cent, and the big banks paying sub-1 per cent.”
Blower further suggests that one-year fixed rates are likely to decline from the current top rate of 4.77 per cent to somewhere around 3.5 per cent, with one-year ISAs likely to hover just above 3 per cent. This potential downturn could affect savers who are relying on higher returns for their deposits, making it a challenging time for those with cash stored in these accounts.
While future base rate cuts are somewhat factored into fixed mortgage rates, these align more closely with the forecasts provided by the markets, rather than the predictions made by the two US banks, Goldman Sachs and Morgan Stanley.
At present, the lowest two-year fixed-rate mortgage sits at 4.22 per cent, while the lowest five-year fixed rate is slightly lower at 4.13 per cent. For most borrowers, however, the rates they are securing will likely fall between 4.13 per cent and 5.5 per cent, depending on various factors such as credit scores and loan-to-value ratios.
If interest rates were to fall to 3.25 per cent or 3.5 per cent, as projected by Goldman Sachs and Morgan Stanley, mortgage rates would likely follow suit. Nicholas Mendes, mortgage technical manager at broker John Charcol, explained that while mortgage rates would decrease, it may not be in direct proportion to the base rate cuts.
Mendes noted, “Lower interest rates reduce borrowing costs, making mortgages more affordable and easing the financial burden on mortgage holders and prospective buyers.” This reduction in mortgage rates could provide some much-needed relief for homeowners and those looking to buy, as the overall cost of borrowing would decrease, potentially stimulating the housing market.
However, other factors, such as lender margins, inflation, and housing market dynamics, will also play a significant role in determining the exact impact on mortgage rates. These variables, alongside base rate cuts, can cause fluctuations in how much borrowers actually pay on their mortgages.
Andrew Hagger suggests that, if the forecasts made by Morgan Stanley or Goldman Sachs were to materialise, the lowest mortgage rates could potentially fall well below 4 per cent by the end of this year. “It will be welcome news for mortgage customers to see rates well below the 4 per cent mark, giving borrowers household budgets a lot more breathing space next time they come to renew their fixed rate,” Hagger explains. This reduction in rates would provide much-needed financial relief for many homeowners.
However, Mendes cautions borrowers to approach interest rate projections with caution. “They are speculative and subject to change based on economic data, MPC voting behaviour, and global events,” he notes. The unpredictability of these factors means that rate cuts are not guaranteed, and borrowers should remain mindful of possible changes.
When choosing between a tracker mortgage, which follows changes in the bank rate, and a fixed-rate mortgage, which offers predictable payments, Mendes advises borrowers to carefully consider the potential movement of rates. A tracker mortgage may benefit from falling rates but could also lead to higher payments in the short term if the bank rate does not reduce as expected. On the other hand, a fixed-rate mortgage offers stability, potentially providing better returns on a two-year fix but at the risk of missing out on future rate reductions if rates fall further.