Goldman Sachs has updated its forecast for the Bank of England’s interest rate cuts. Instead of a predicted cut in November, they now believe the next cut won’t happen until February. The new forecast indicates quarterly cuts, bringing the Bank’s rate down to 3% by the end of 2026. Following this announcement, the British pound saw a slight rise in value.

Updated Outlook on Interest Rates

We need to change our view on when the Bank of England will cut interest rates. Now, it looks like rates will stay higher for a longer time, with the first cut expected in February 2026. This means we should brace for UK interest rates to remain steady for at least five more months. This change comes as a result of recent economic data. The August 2025 inflation numbers showed the Consumer Price Index (CPI) at 2.9%, still well above the Bank’s 2% goal. With minimal economic growth in the second quarter of 2025, the Bank faces a tough situation, making any rate cuts this year unlikely. For those trading interest rate derivatives, it’s time to reassess any positions tied to the SONIA rate. Futures contracts for December 2025 and March 2026 will need adjustments to account for fewer or no rate cuts during that time. It seems wise to consider selling these contracts or reducing exposure in the coming weeks.

Effects on the Pound and Bonds

In the currency markets, this news may support the British pound. A prolonged higher rate environment enhances the appeal of sterling, especially since the European Central Bank is still hinting at potential cuts. We might want to position for GBP to remain strong against the euro and the U.S. dollar through year-end. We should also expect more volatility in short-term UK government bonds, or gilts. As the market reacts to this new timeline, there will be uncertainty about when and how quickly the cuts in 2026 will occur. Using options to trade around this expected volatility could be a smart move. Reflecting back, we witnessed a similar scenario in 2023-2024 when persistent service inflation pushed back expectations for rate cuts. This period reminded us that the Bank of England prioritizes tackling inflation, even if it slows economic growth. History suggests we should not underestimate their commitment to waiting for clear signs that price pressures have eased for good. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now