Why the Bank of England Could Cut Rates More than Expected

The Bank of England (BoE) could cut interest rates faster and further than markets are pricing in, according to Goldman Sachs Research.

The central bank reduced interest rates by 25 basis points to 4% last week following signs that inflation is coming down. But a closer-than-expected vote by the BoE’s Monetary Policy Committee (MPC) and communications from the MPC emphasizing risks from headline inflation were interpreted by markets as a sign that rates could fall slower than previously anticipated.

Despite the hawkish messaging, Goldman Sachs Research has maintained its forecast for the BoE to cut interest rates again in November, followed by a pause in December and three sequential cuts in early 2026 (February, March, and April). The estimates are supported by Goldman Sachs Research’s forecasts for inflation to moderate.

“While a November pause is certainly possible with upside surprises to the data, we believe that the market is underpricing the chance of a cut in November,” Goldman Sachs Research economists Jari Stehn and James Moberly write in the team’s report.

There’s a great deal of uncertainty about the BoE’s plans for lower interest rates, but the team projects that the central bank’s terminal rate (the point at which it stops cutting rates) will be 3%—below market expectations of 3.5%.

What’s the outlook for inflation in the UK?

Inflation overshot economists’ estimates in June, with core inflation rising 0.2 percentage points to 3.7%. But Goldman Sachs Research still expects inflation to cool over the next year.

This is partly because there are signs that the job market is weakening. For example, a weighted average of employment indicators including payrolls and job surveys suggests that employment is contracting. Declines in the job-vacancies-to-unemployment ratio are telling a similar story.

“Increasing labour market slack is consistent with our estimates that the economy is now operating significantly below potential,” writes Jari Stehn in a separate report.

Meanwhile, growth in private sector regular pay has fallen from 5.9% in January to 4.8% in June. Goldman Sachs Research expects private sector pay growth to slow further, to 3.5%, by the end of the year.

“High wage growth has been a key reason for high services inflation compared to other countries, so progress here will be important for the inflation outlook,” Stehn writes.

Given rising slack in the job market and slowing pay growth, the team expects underlying services inflation to cool steadily in the second half of the year. Headline inflation, a measure of the overall inflation in the economy, is forecast to peak at 3.8% in September, before slowing notably in the first half of 2026. The team expects UK inflation to be more in line with other advanced economies by the second half of next year.

Growth is likely to remain subdued

Economic growth in the UK slowed notably in the second quarter of the year. After a stronger-than-expected expansion in the first quarter, economic growth slowed to 0.3% in the second quarter, with household spending growth decelerating to just 0.1%. At the same time, the UK is still exposed to trade tensions and weaker global growth, despite the recent US-UK trade deal which has reduced trade risks.

More subdued growth momentum is expected to persist: Goldman Sachs Research forecasts that growth will remain at 0.3% in the third quarter before slowing to 0.2% in the fourth quarter.

Fiscal policy could tighten in the face of slower economic growth. The Chancellor of the Exchequer has £9.9 billion ($13.3 billion) of headroom against her fiscal rules, but this buffer is likely to be eliminated following the government’s reversal of its social spending cuts and a likely downgrade in projections for economic growth from the Office for Budget Responsibility.

In order for the government to stick to its fiscal rules, Stehn and Moberly write, “we see a significant chance of sizeable tax increases in the Autumn Budget that we would expect to weigh on growth prospects.”

Overall, the team projects that the UK economy will grow 1.1% in 2026.

Slow growth is likely to lead to further weakness in the job market and reduce inflationary pressures. That in turn has implications for monetary policy. “We are sceptical that Bank Rate can stay around 3.5% persistently—as priced by financial markets—without materially weakening the economy and thus inflation,” writes Stehn in the report.

 

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