Goldman Sachs Asset Management predicts that the Bank of England will keep interest rates unchanged until the end of 2025. Ongoing inflation and a steady labour market are reasons for not lowering rates anytime soon. While overall inflation has gone down, underlying factors remain too strong for officials to cut rates right now. A stable labour market gives the Monetary Policy Committee the freedom to maintain their current policy.

Potential Turning Point

November’s budget could change everything. If the budget negatively affects UK growth, the Bank of England may need to act quickly to support the economy. Goldman Sachs AM doesn’t expect any rate cuts for the rest of the year, but this depends on how the budget unfolds. Goldman Sachs AM predicts that rate cuts could start again in February 2026. By then, inflation is expected to decrease further, allowing for better assessments of growth. We believe the Bank of England will hold its policy rate steady until the end of 2025, resulting in a stable period. This indicates strategies that benefit from low volatility, like selling short-term options on UK interest rates. Futures contracts for December 2025 already show a strong likelihood of this inaction. The Bank’s caution is justified, as core inflation for August remained steady at 3.1%, well above the 2% target. The labour market has stabilized, with unemployment recently dropping to 4.2% and wage growth still strong. This situation eliminates immediate pressure on policymakers to reduce rates.

Main Event Risk

The upcoming November budget poses a key risk event that could change the interest rate outlook. A tight budget might lead to earlier rate cuts, while a looser budget would support keeping rates steady into 2026. For traders, this means buying volatility through tools like straddles on the pound or gilt futures, which could profit from a major market shift due to the budget. We still expect the easing cycle to resume in February 2026, marking a long pause after the significant rate hikes in 2023. This view suggests positioning for a steeper yield curve over the next six months, where long-term bond yields fall faster than short-term ones. Options could include receiving fixed rates on swaps for early next year while paying fixed on shorter-term contracts. Create your live VT Markets account and start trading now.

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