Goldman Sachs has revised its forecast regarding the Bank of England’s interest rate cuts. Previously predicting a rate cut in November, the bank now believes the next cut will happen in February.
The revised forecast includes quarterly cuts, leading to a terminal Bank rate of 3% by 2026’s end. Following the announcement, the British pound experienced a slight increase in value.
Revised Expectations For Interest Rates
It appears we must adjust our view that the Bank of England will cut interest rates in 2025. The new expectation is that rates will stay higher for longer, with the first cut not happening until February 2026. This shift means we should prepare for UK interest rates to remain at their current level for at least another five months.
This revised outlook is supported by recent economic data. The latest inflation figures from August 2025 showed the Consumer Price Index (CPI) at 2.9%, which is still stubbornly above the Bank’s 2% target. With the UK economy showing minimal growth in the second quarter of 2025, the Bank is in a difficult position, but these inflation numbers make rate cuts this year very unlikely.
For those of us trading interest rate derivatives, this means we should re-evaluate positions tied to the SONIA rate. Futures contracts for December 2025 and March 2026 will need to be repriced to reflect fewer, or no, rate cuts in that period. Selling these contracts or reducing long exposure appears to be the logical move in the coming weeks.
Implications For The Pound And Bonds
In the currency markets, this news should provide a floor for the British pound. A higher-for-longer rate environment makes sterling more attractive, especially as the European Central Bank is still signaling potential cuts. We might consider positioning for GBP to hold its strength against the euro and the U.S. dollar through the end of the year.
We should also anticipate an increase in volatility in short-term UK government bonds, or gilts. As the market digests this new timeline, there will be uncertainty around the exact timing and pace of the 2026 cuts. Using options to trade this expected choppiness could be an effective strategy.
Looking back, we saw a similar situation in 2023-2024, when sticky services inflation repeatedly pushed back expectations for rate cuts. That period taught us that the Bank of England will prioritise fighting inflation even at the cost of slower economic growth. History suggests we should not underestimate their resolve to wait for clear evidence that price pressures have eased permanently.
