Bank of England to cut rates five times in 2025, says Morgan Stanley

Morgan Stanley has forecast that the Bank of England will implement five interest rate cuts in 2025 to bolster a faltering economy.

On Monday, the US investment bank revised its growth forecasts downward, attributing this to the prolonged effects of the Bank's monetary tightening and repercussions from the Budget, as reported by City AM.

It now anticipates the UK economy to expand by just 0.9 per cent in 2025, a decrease from the previous projection of 1.3 per cent and significantly below the consensus among City economists.

"While the peak impact of the Bank of England’s policy tightening is likely behind us, its drag on the economy still persists," Morgan Stanley analysts wrote.

They also observed that the measures announced in the Budget have negatively affected business sentiment. The analysts highlighted a "limited hiring appetite" even before the increase in employment costs, with demand becoming "lacklustre to non-existent" post-Budget.

Recent purchasing managers’ index (PMI) data indicates that companies have been shedding jobs at the quickest rate since the financial crisis, barring the pandemic period.

"The mood music has deteriorated meaningfully since the summer," the analysts commented, suggesting that the Bank would focus more on the weakening economic activity than on persistent inflation signs.

According to Morgan Stanley's predictions, the Bank Rate would end the year at 3.50 per cent, a reduction from the current 4.75 per cent. Goldman Sachs, another Wall Street heavyweight, also expects the Bank to aggressively cut rates, forecasting six reductions by mid-2026.

These forecasts are considerably more dovish than market predictions, which suggest three or four rate cuts by mid-next year. Policymakers are set to convene again on 6 February, with a third rate cut expected to be endorsed.