A surprise jump in inflation and signs of persistent wage growth this week has led Goldman Sachs to downgrade its Bank of England rate cut expectations for the rest of the year.
The US investment bank Goldman still expects a rate cut in August from 4.25% to 4%, but dropped its forecast of a September reduction, in a note to clients.
However, Goldman is still more bullish than the market consensus, forecasting three cuts in 2025.
Most traders expect two more cuts this year, to follow two quarter-point reductions the Bank made at Monetary Policy Committee meetings in February and May.
Goldman Sachs chief European economist Sven Jari Stehn told clients: “While the hurdle for speeding up cuts in September looks higher after this week’s data, we now expect sequential cuts from November until reaching a 3% terminal rate in March 2026 [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] and two next year [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 were to open up more quickly”.
Disclaimer: This story is auto-aggregated by a computer program and has not been created or edited by finopulse.
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