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Investing.com -- Goldman Sachs has revised its forecast and now expects the Bank of England to cut interest rates by 25 basis points at its November meeting, citing weaker-than-anticipated economic data.
The investment bank had previously dropped its November cut forecast after the September Monetary Policy Committee meeting due to firmer inflation data and hawkish communication from the central bank. However, recent economic indicators have shifted the outlook.
Several factors support the case for a rate cut. Inflation has surprised to the downside, with services inflation running 0.35 percentage points below the MPC’s August forecast. Private sector regular pay growth has cooled further and is tracking to undershoot the BoE’s Q3 projection by 0.37 percentage points.
The labor market continues to weaken, with unemployment likely to rise 0.1 percentage points above the August forecast for Q3. Growth data has been softer than expected, with Q3 GDP growth tracking 0.2 percentage points below the MPC’s latest estimate.
Goldman Sachs also notes increased confidence that the November 26 Budget will deliver a significant contractionary impact on the economy, with expectations of £30 billion (1% of GDP) in fiscal measures.
Despite these factors, the decision will be close. Headline inflation remains high at 3.8%, and concerns about potential second-round effects persist given continued upward pressure on survey inflation expectations. MPC commentary since September has remained cautious regarding near-term rate cuts.
Goldman Sachs predicts a 5-4 vote for a 25 basis point cut, with Governor Bailey joining Dhingra, Taylor, Breeden and Ramsden in voting to lower rates. The bank expects the MPC to maintain its guidance toward "gradual and careful" cuts.
Looking ahead, Goldman Sachs maintains its view that the MPC will lower the Bank Rate in quarterly steps to 3% but now expects this terminal rate to be reached by July 2026 rather than November.