Economists see UK cutting interest rates more substantially as inflation pressures ease

LONDON — The U.K. is likely to see interest rates drop at a faster pace than previously expected, according to economists who flagged key data releases that indicated inflationary pressures are finally easing.

However, the Labour government's debut budget due at the end of the month will prove crucial, as market participants wait to assess the economic impact.

As of Tuesday, money markets had fully priced in a quarter-percentage-point rate cut for the Bank of England's next meeting in November, and put a high probability on a cut of the same size at its December meeting.

That would take the central bank's key rate from its 16-year-high of 5.25% at the start of the year, to 4.5% by the end. Pricing then suggests a further decline to 4% by the May 2025 meeting, and to 3.5% by December 2025.

However, economists at Goldman Sachs in a Monday note forecast rate cuts "notably below market pricing." They attribute this to their calculation of the neutral real rate of interest (which sees the economy at 2% inflation with full employment) at 0.8% for the second quarter of 2024, along with the rapid fall in U.K. inflation and dovish comments from BOE policymakers.

As a result, they see consecutive 25 basis point cuts taking the Bank Rate to 3% as early as September 2025, and to 2.75% in November next year.

The BOE has consistently maintained a cautious tone on the path of inflation over the last three years of painful price rises. When its Monetary Policy Committee voted 8 to 1 to hold rates at its Sept. 19 meeting, it said a "gradual approach" to easing policy continued to be appropriate, particularly as services inflation remained "elevated."

Price rises are still high in the services sector, which contributed 81% to the U.K.'s economic