UK Bond Issuance Plan and Interest Rate Forecast

Zhitong Finance reports that Goldman Sachs has revised its forecast for the Bank of England’s interest rate decision in December, now expecting rates to remain unchanged. This update comes after the investment bank described the British budget as “more expansionary.”

Goldman Sachs economists stated in a report, “The prospect of stronger economic growth in 2025 may reduce the urgency of successive interest rate cuts in the short term. Although there is still the possibility of a sharp decline in economic data between now and December, especially inflation data, a rate cut is still possible, but we now think a pause in rate cuts is more likely.”

UK Budget and Bond Issuance

Chancellor of the Exchequer Rachel Reeves announced the largest tax increase in 30 years in her first budget, aiming to repair the country’s public services through significant spending. The UK Debt Management Office (DMO) announced that £297 billion of government bonds would be issued in the 2024-2025 fiscal year, exceeding the estimated £293 billion obtained by a foreign media survey of 16 bond dealers.

RBC strategist Megum Muhic commented, “Both the short-term and long-term gilt issuance is higher than expected, which doesn’t look optimistic.” The borrowing target is the highest on record outside of emergency response measures during the 2020 coronavirus pandemic.

Impact on Gilts and Interest Rates

The planned increase in bond issuance has weighed on the performance of gilts this year. The market expects that due to lingering domestic price pressure in the UK, the Bank of England may not be as aggressive in cutting interest rates as European and American central banks, resulting in British government bonds performing worse than similar European and American government bonds.

In addition to government bond issuance, short-term treasury bills are expected to provide £3 billion of net financing needs for the government. The new plan is slightly tilted toward longer-term debt issuance, but short-term and medium-term debt will still make up the majority of issuance.

Goldman Sachs’ Forecast

Goldman Sachs continues to predict that the Bank of England will cut interest rates by 25 basis points at its November meeting, followed by continuous interest rate cuts starting in February next year, and reducing the bank interest rate to 3% in November next year.

The investment bank has also raised its forecast for UK GDP in 2025 to 1.6% from 1.5% and expects inflation to rise modestly due to stronger demand linked to GDP growth.