Goldman Sachs Analyst Predicts Accelerated Bank of England Rate Cuts Amid Economic Weakness

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Goldman Sachs economist Sven Jari Stehn has forecasted that the Bank of England (BoE) will accelerate its pace of interest rate cuts, citing mounting evidence of economic weakness and softening inflation pressures.

Markets anticipate 2-3 rate cuts in 2025, with a terminal Bank Rate around 4%, but Stehn argues that the central bank’s cautious stance may soon give way to more decisive action as the UK economy faces multiple headwinds.

Stehn highlights a significant deterioration in the UK’s growth outlook as a key driver of his prediction. Fourth-quarter GDP growth for 2024 was tracked at -0.1%, and the Current Activity Indicator dropped to -2.0% on an annualised basis in December.

For 2025, Goldman Sachs projects GDP growth of just 0.9%, far below the consensus estimate of 1.3% and the Bank of England’s forecast of 1.5%.

"With rising trade tensions, slowing household disposable income growth, and the front-loaded impact of fiscal policies, the economy is grappling with significant headwinds,” Stehn wrote. “The outlook warrants a more aggressive monetary policy response to support demand."

Image courtesy of Goldman Sachs.

Labour Market Weakens

The UK’s labour market, once a pillar of economic resilience, is showing signs of strain. Unemployment has risen to 4.4%, and alternative indicators such as payroll data and PMI surveys point to cooling employment trends. Stehn also noted that upcoming increases in National Insurance contributions could further dampen labour market strength.

The weakening employment landscape is likely to reduce wage pressures, which have been a key driver of services inflation. “This dynamic should ease inflationary pressures over time, providing room for the BoE to cut rates without risking an inflation overshoot,” Stehn explained.

Inflation Pressures Begin to Subside

Although headline inflation remains high, Stehn’s report points to evidence that underlying inflation is moderating. Trimmed core inflation stands at 3.5%, and Goldman Sachs expects headline inflation to return to the BoE’s 2% target by 2026. Temporary factors, such as VAT on private school fees and higher vehicle excise duties, are driving short-term inflation but are unlikely to persist.

“As demand continues to soften, the pass-through from higher costs to consumer prices will diminish, paving the way for a more accommodative monetary policy,” Stehn said.

Monetary Policy to Shift Gears

The BoE’s current policy rate of over 4% is seen as excessively restrictive. Stehn estimates the neutral nominal interest rate at approximately 2.75%, suggesting that current policy settings are unnecessarily suppressing economic activity.

“While the Monetary Policy Committee (MPC) has signaled a preference for gradualism, the risk of prolonged economic stagnation could force a more accelerated approach to rate cuts,” Stehn wrote.

Goldman Sachs forecasts a 25 basis point cut at the BoE’s February 6 meeting, followed by additional quarterly reductions. By mid-2026, the bank projects a terminal rate of 3.25%, significantly below market expectations. Stehn assigns a 30% probability to a faster pace of rate cuts if demand continues to falter.

Market Implications

Stehn’s analysis suggests that financial markets are underestimating the scale of the BoE’s future easing. Goldman Sachs expects 10-year gilt yields to fall to 4% by the end of 2025, reflecting both lower policy rates and subdued growth expectations.

“The Bank of England is likely to adopt a more proactive stance as the economic environment deteriorates,” Stehn concluded. “Policymakers must balance the need to contain inflation with the imperative to revive growth, and the scales are increasingly tipping toward the latter.”

As the BoE faces its next policy decision, all eyes will be on whether the central bank accelerates its pace of easing to counteract mounting economic challenges.