UK interest rates will fall faster and further than markets expect, two giant US banks predict

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The Bank of England is likely to cut interest rates far further and faster than markets currently expect, two giant US banks forecast.

Morgan Stanley predicts UK interest rates to fall to 3.5 per cent by the end of this year, while Goldman Sachs says interest rates will fall to 3.25 per cent by June next year. 

Currently, markets are pricing in only two or three rate cuts this year with the base rate expected to fall from 4.75 per cent to 4 per cent. 

But analysts at both US banks are sceptical of this general consensus that has been all but priced in financial markets.

They believe that the UK economy will struggle over 2025 forcing the Bank of England to take action and cut rates more aggressively.

Both banks say lower GDP growth will be exacerbated by a slowdown in household disposable incomes.

Goldman Sachs sees further pressure coming from rising trade tensions.

As a result, both expect growth of only 0.9 per cent in 2025 – below the Bank of England’s 1.5 per cent and the OBR’s 2 per cent forecasts, as well as the market consensus of 1.3 per cent. 

Analysts at both banks also think interest rates will be cut further and faster than expected because the labour market is weakening.

They point to negative employment effects from the upcoming National Insurance  increase as well as HMRC’s payroll data showing a continued decline in employment.

Morgan Stanley’s report states: ‘We still expect the cut in February, and bank rate at 3.5 per cent by year-end. We now expect cuts in February, May, June, August and November.’

Analysts at Goldman Sachs also point out that some MPC members are already calling for lower rates to avoid an inflation undershoot given weakening demand across the economy.

Its report states: ‘A cut on 6 February is very likely and largely priced by financial markets. 

‘But we believe that markets are pricing too few rate cuts beyond that relative to our bank rate forecast of 3.25 per cent in the second quarter of 2026. 

‘While it is possible that the Bank of England will slow the pace of cuts if underlying inflation fails to make progress (20 per cent probability), we believe that a step-up to a sequential pace of cuts in response to weaker demand is actually more likely (30 per cent odds).’

What this means for mortgages and savings?

Savings rates are likely to suffer if Morgan Stanley’s and Goldman Sachs’ forecasts come true.

With the base rate at 4.75 per cent, the best easy-access savings rates are hovering between 4.5 per cent and 4.75 per cent while the best fixed rates are broadly in line – the best one-year deal currently being offered by Vida Bank at 4.77 per cent.

If interest rates fall by 1.25 percentage points and reach 3.5 per cent by the end of this year, it is likely that this will be broadly reflected across many savings deals, according to Andrew Hagger, a personal finance expert at Moneycomms.

‘The falls would be pretty much mirrored in the savings market with easy access and one year fixed rates around the 3.5 per cent mark,’ says Hagger. 

‘As for longer term fixes it depends on the economic outlook at the end of 2025.’

James Blower, founder of The Savings Guru, suggests it could be even more damaging for those who hold their cash in easy-access savings accounts.

He says: ‘If they are correct, then we are looking at easy access best buys falling to around 3 or 3.25 per cent and the big banks paying sub 1 per cent. 

‘One year-fixed rates are likely to drop from the 4.77 per cent top rate of today to somewhere around 3.5 per cent with one-year Isa best buys probably just above 3 per cent.’

While future base rate cuts are somewhat priced into fixed mortgage rates, this is more in line with what markets are forecasting, rather than the two US banks.

The lowest two-year fixed rate mortgage is currently 4.22 per cent while the lowest five-year fix is 4.13 per cent. 

In reality, most borrowers will be securing rates anywhere between 4.13 and around 5.5 per cent.

If interest rates fall to 3.25 per cent or 3.5 per cent as projected by Goldman Sachs and Morgan Stanley, mortgage rates would likely fall as well, according to Nicholas Mendes, mortgage technical manager at broker John Charcol said – although it may not be in direct proportion. 

‘Lower interest rates reduce borrowing costs, making mortgages more affordable and easing the financial burden on mortgage holders and prospective buyers,’ said Mendes.

‘However, other factors like lender margins, inflation, and housing market dynamics will also influence the exact impact on mortgage rates.

Andrew Hagger says that were Morgan Stanley’s or Goldman Sachs’ forecast to come true, the lowest mortgage rates will likely be well below 4 per cent by the end of this year. 

‘It will be welcome news for mortgage customers to see rates well below the 4 per cent mark, giving borrowers household budgets a lot more breathing space next time they come to renew their fixed rate,’ says Hagger.

Mendes warns borrowers to take interest rate projections with a pinch of salt. 

‘They are speculative and subject to change based on economic data, MPC voting behaviour, and global events,’ he adds.

‘Borrowers should carefully weigh the potential movement of rates when deciding between a tracker mortgage (which follows bank rate changes) and a fixed-rate mortgage (which offers predictable payments). 

‘A tracker may benefit from falling rates but could also lead to higher payments in the short term if the bank rate does not reduce as expected. 

‘Conversely, a fixed-rate mortgage provides stability and may offer better returns on a two-year fix but could result in missing out on potential rate reductions if rates fall further.’