A shock bounce in inflation and indicators of persistent wage development this week has led Goldman Sachs to downgrade its Bank of England rate cut expectations for the remainder of the yr.
The US funding financial institution Goldman nonetheless expects a rate cut in August from 4.25% to 4%, however dropped its forecast of a September discount, in a word to shoppers.
However, Goldman continues to be extra bullish than the market consensus, forecasting three cuts in 2025.
Most merchants count on two extra cuts this yr, to comply with two quarter-point reductions the Bank made at Monetary Policy Committee conferences in February and May.
Goldman Sachs chief European economist Sven Jari Stehn informed shoppers: “While the hurdle for dashing up cuts in September appears greater after this week’s information, we now count on sequential cuts from November till reaching a 3% terminal rate in March 2026 [Goldman had previously said it would hit this rate in February].
“We now count on a complete of 5 cuts this yr [it had previously forecast six] and two subsequent yr [it had previously one.”
The US bank pegged back its forecast after inflation rose unexpectedly to 3.6% in the year to June, from 3.4% in May, pushed up by higher food, transport and motor fuel prices. The Bank’s target is 2%.
It also points to private sector regular pay, which slowed to 4.9% from 5.2%, but also came in higher than expected”. Monetary Policy Committee members have long said they want to see wage growth fall below 5%.
But Goldman says set against this, there are increasing signs of “slack” in the labour market, which saw the unemployment rate rise to 4.7% this week, its highest in four years, while the number of job vacancies has now been falling continuously for three years.
The US bank predicts private sector pay growth to slow to 3.6% by the end of the year.
It adds that the Bank will be forced to act on rates to prop up the economy.
Stehn says that UK “growth has now slowed notably following a stronger-than-expected first quarter, with second quarter GDP growth tracking at 0.1%.”
The US bank also points to comments made over the last few weeks by Bank governor Andrew Bailey and deputy governor Dave Ramsden, on a weakening labour market that may spur faster rate cuts in the second half of the year.
The US bank says both rate-setters have “noted that the Monetary Policy Committee could re-evaluate the appropriate speed of cuts if [labour market] slack have been to open up extra shortly”.
