Goldman Sachs has adjusted its forecast regarding the Bank of England's interest rates, now anticipating that rates will remain unchanged in December. Previously, they had expected a 25 basis point cut, citing a more expansive UK budget. Economists from Goldman Sachs stated that the prospects for stronger economic growth in 2025 could reduce the urgency for consecutive rate cuts in the short term. While a rate cut is still possible if economic data, particularly inflation, declines sharply, they now believe a pause is more likely.
The UK's Finance Minister, Rachel Reeves, recently announced the largest tax hike in 30 years in her first budget, highlighting the need for significant spending to repair the nation's public services. The UK Debt Management Office plans to issue £297 billion in government bonds for the fiscal year 2024-2025, exceeding the forecast of £293 billion from a survey of bond dealers.
RBC strategist Megum Muhic noted that the unexpectedly high issuance of UK bonds is concerning both in the short and long term. This borrowing plan is among the highest outside the emergency measures during the COVID-19 pandemic, impacting UK bonds' performance this year as the government plans to increase bond issuance. The Bank of England is not expected to cut interest rates as aggressively as its counterparts in the US and Europe due to persistent domestic price pressures, which may lead to underperformance of UK bonds compared to them.
In addition to bond issuance, short-term treasury bills are projected to provide £3 billion in net financing for the government, though previous estimates were around £6 billion. The new plan slightly favors long-term bonds, but short and medium-term bonds continue to be the primary issuance.
Despite previous communications suggesting an aggressive rate-cutting strategy, Goldman Sachs projects that the Bank of England will cut rates by 25 basis points at its November meeting. They expect a series of cuts to follow, lowering the bank rate to 3% by November of next year, up from a prior forecast of 2.75%. Additionally, Goldman Sachs raised its UK GDP forecast for 2025 from 1.5% to 1.6%, with inflation expected to rise moderately due to increased demand linked to GDP growth.
