February 3, 2025 2:45 pm

Insert Lead Generation
Nikka Sulton

The Bank of England is likely to cut interest rates far faster and further than markets currently expect, according to predictions made by two major US banks.

Morgan Stanley forecasts that UK interest rates will drop to 3.5 per cent by the end of this year. Meanwhile, Goldman Sachs anticipates a reduction to 3.25 per cent by June next year. Currently, financial markets are pricing in only two or three rate cuts this year, with the base rate expected to decrease from 4.75 per cent to 4 per cent.

However, analysts at both banks remain sceptical of the general consensus that has already been priced in by financial markets. They predict that the UK economy will face challenges throughout 2025, prompting the Bank of England to take more aggressive action and cut rates at a faster pace.

Both Morgan Stanley and Goldman Sachs believe that lower GDP growth will be further compounded by a slowdown in household disposable incomes. Goldman Sachs also points to rising trade tensions as an additional pressure on the economy.

As a result, both banks expect growth to be only 0.9 per cent in 2025. This is below the Bank of England’s forecast of 1.5 per cent, the Office for Budget Responsibility’s (OBR) forecast of 2 per cent, and the market consensus of 1.3 per cent.

Both sets of analysts also agree that interest rates will be reduced more quickly than expected due to a weakening labour market. They cite negative employment effects from the upcoming National Insurance increase, as well as data from HMRC’s payroll figures, which indicate a continued decline in employment.

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

Goldman Sachs analysts also note that some members of the Monetary Policy Committee (MPC) are already advocating for lower rates to avoid an inflation undershoot, given the weakening demand across the economy.

Their report states: “A cut on 6 February is very likely and largely priced by financial markets. However, 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).”

 

What this means for mortgages and savings?

If Morgan Stanley’s and Goldman Sachs’ forecasts are realised, savings rates are likely to take a hit.

Currently, with the base rate set at 4.75 per cent, the best easy-access savings rates are hovering between 4.5 per cent and 4.75 per cent. Fixed-rate savings offers are similar, with Vida Bank offering the best one-year deal at 4.77 per cent. However, should interest rates fall by 1.25 percentage points to 3.5 per cent by the end of this year, it is likely that these reductions will be reflected across many savings deals.

Andrew Hagger, a personal finance expert at Moneycomms, believes that such a decrease would result in easy-access and one-year fixed rates dropping to around 3.5 per cent. He added that for longer-term fixed rates, the impact will depend on the economic outlook by the end of 2025.

James Blower, founder of The Savings Guru, suggests the consequences could be even worse for those with funds in easy-access savings accounts. He says, “If they are correct, we could see easy-access best buys fall to around 3 or 3.25 per cent, with the major banks paying below 1 per cent. One-year fixed rates may drop from the current top rate of 4.77 per cent to about 3.5 per cent, with one-year ISAs likely seeing best rates just above 3 per cent.”

In contrast, fixed mortgage rates have somewhat accounted for future base rate cuts, although this aligns more with market expectations rather than the predictions of Morgan Stanley and Goldman Sachs. The lowest two-year fixed mortgage rate is currently 4.22 per cent, while the lowest five-year rate is 4.13 per cent. However, in practice, most borrowers will likely secure rates ranging between 4.13 per cent and 5.5 per cent.

Should interest rates fall to 3.25 per cent or 3.5 per cent, as suggested by both US banks, mortgage rates would likely decline too. However, as Nicholas Mendes, mortgage technical manager at John Charcol, explains, this drop may not be in direct proportion. He notes, “Lower interest rates reduce borrowing costs, making mortgages more affordable and easing the financial burden on mortgage holders and prospective buyers. However, other factors like lender margins, inflation, and housing market dynamics will also influence the exact impact on mortgage rates.”

Hagger adds that if the forecasts from Morgan Stanley or Goldman Sachs come true, the lowest mortgage rates could fall well below 4 per cent by the end of this year. “It will be welcome news for mortgage customers to see rates fall below the 4 per cent mark, providing borrowers with more breathing room when it comes time to renew their fixed rates,” he says.

However, Mendes advises 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 cautions.

“Borrowers should carefully weigh the potential movement of rates when deciding between a tracker mortgage (which follows bank rate changes) and a fixed-rate mortgage (which offers predictable payments). A tracker 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. Conversely, a fixed-rate mortgage provides stability and may offer better returns on a two-year fix, but could result in missing out on potential rate reductions if rates fall further.”

 

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