Goldman Sachs Asset Management anticipates the Bank of England will maintain interest rates through 2025. Persistent inflation and a stabilising labour market are discouraging any near-term rate cuts.
The firm observes that while headline inflation has eased, underlying pressures remain too high for policymakers to lower rates just yet. Stabilisation in the labour market gives the Monetary Policy Committee room to keep policy steady for now.
Potential Turning Point
November’s budget is considered a potential turning point. Should fiscal measures negatively impact UK growth, the Bank of England might need to respond sooner to support the economy. Goldman Sachs AM does not expect any rate cuts for the remainder of the year, but notes this depends on the budget’s outcome.
Goldman Sachs AM forecasts a resumption of rate cuts in February 2026. By then, inflation is anticipated to have decreased further, allowing for clearer growth assessments.
We expect the Bank of England to keep its policy rate on hold through the end of 2025, creating a period of stability. This suggests strategies that profit from low volatility, such as selling short-dated options on UK interest rates. The current pricing of futures contracts for December 2025 already reflects this high probability of inaction.
The Bank’s caution is understandable given that core inflation for August stubbornly remained at 3.1%, significantly above the 2% target. We’ve also seen the labour market stabilize, with unemployment recently ticking down to 4.2% and wage growth still firm. This combination removes any immediate pressure on policymakers to cut rates.
Main Event Risk
The main event risk on the horizon is the November budget, which could significantly alter the interest rate outlook. A fiscally tight budget could accelerate rate cut expectations, whereas a looser stance would reinforce the case for holding firm into 2026. For traders, this points towards buying volatility through instruments like straddles on the pound or gilt futures, which would pay off if the budget triggers a large market move.
Our base case remains that the easing cycle will resume in February 2026, marking a long pause after the aggressive rate hikes we saw through 2023. This view suggests positioning for a steeper yield curve over the next six months, where longer-term bond yields fall faster than short-term ones. Derivative trades could involve receiving fixed rates on swaps dated for early next year while paying fixed on shorter-term contracts.
