The Bank of England is poised to cut interest rates much faster than investors anticipate over the next year, but policy will remain more restrictive over the long term thanks to higher public debt and population growth.
Researchers at Goldman Sachs, the Wall Street investment bank, said that the UK’s underlying interest rate had increased to 2.75 per cent since the Covid-19 pandemic, well above the negative real-terms level seen in the decade after the global financial crisis. After accounting for inflation, Goldman Sachs estimated that the real “neutral interest rate” is now 0.8 per cent, in line with its historical average since 1870.
At its current level of 5 per cent, the UK base rate “remains notably restrictive”, Goldman Sachs said, adding that the