By this time next year, Goldman Sachs predicts that interest rates in the UK would drop to 3%, which would be a significant benefit for millions of borrowers.

The Bank of England will "reconsider its cautious approach" and accelerate rate reduction later this year, according to experts at the Wall Street investment bank.

The Bank reduced its benchmark rate last month for the first time since 2020 but is widely expected to leave it on hold at 5 per cent when officials meet next week.

Markets are betting that there will be two further cuts by the end of this year but few think the Bank’s Monetary Policy Committee (MPC) will proceed as aggressively as Goldman is predicting.

In a note to clients, Goldman forecast that rates would be cut to 3 per cent by September 2025, with the cycle starting in November. That implies a quarter percentage point rate cut in every meeting over that period.

The Bank of England adopted a cautious approach to rate-cutting earlier this year. 

That was due to concerns about continued high pay growth and inflation in the services sector – worries that are now abating, according to Goldman Sachs.

James Moberly, an economist at the bank, wrote: ‘We see compelling reasons for the MPC to accelerate the pace of easing as wage pressures moderate and underlying services inflation falls back.’

The wider market predicts a slower path, with rates at 3.5p per cent next September and falling to 3.25 per cent by the end of 2025. Deutsche Bank sees rates reaching 3 per cent in the summer of 2026.

The Goldman report came as a Bank of England survey revealed that public expectations for inflation over the coming year have dropped to the lowest level for three years. 

The poll taken last month found the public’s inflation expectations for the coming 12 months fell to 2.7 per cent, the lowest since August 2021. Inflation now stands at 2.2 per cent – and is not expected to change when latest figures are published next week.

But the Bank keeps a close eye on public expectations of price pressures as they can create their own momentum: if workers think prices are shooting up, they will demand steeper wage hikes, potentially fuelling more inflation.

In the US, the Federal Reserve is expected to cut rates next Wednesday by at least a quarter of a percentage point – with speculation they might even go as far as a jumbo half-point hike. Elsewhere, the European Central Bank this week cut rates for the second time this year.

Santander yesterday became the first major UK wide lender to offer a sub-4 per cent two-year fixed rate mortgage deal. It announced that from Tuesday a 60 per cent loan-to-value two-year purchase product will be available at 3.99 per cent.

Brokers are anticipating further rate cuts next week as lenders fight to reprice their deals in a bid to attract fresh borrowers. 

Craig Fish, of Lodestone Mortgages, said: ‘This is aggressive pricing and will really light the touch paper under the competition.’