Surprise jumps in inflation and signs of continued wage growth this week have led Goldman Sachs to downgrade its Bank of England tax rates to lower expectations for the rest of the year.
U.S. investment bank Goldman still expects to drop from 4.25% to 4% in August, but lowered its forecast for September reduction in a case to clients.
However, Goldman Sachs is more bullish than market consensus, predicting three cuts in 2025.
Most traders expect two cuts this year, followed by two cuts at the Monetary Policy Committee meetings in February and May.
“While the hurdles to accelerated cuts in September look higher after this week’s data, we now expect to cut jobs starting in November to end 3% in March 2026,” Sven Jari Stehn, chief European economist at Goldman Sachs, told clients. [Goldman had previously said it would hit this rate in February].
“We now expect a total of five cuts this year [it had previously forecast six] Next year two [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] Slackness opens up faster. ”
