Interest charges will solely fall to three.75% subsequent 12 months, says Santander – days after Goldman Sachs’ far spicier forecast

Interest rates will fall to 3.75 per cent by the end of next year, banking giant Santander has predicted, bucking a trend of bolder rate cut forecasts.

With the Bank of England base rate currently at 5 per cent, this would mean 1.25 percentage points worth of cuts by Christmas 2025.

Santander’s forecast comes days after Goldman Sachs prediction that interest rates would fall to 2.75 per cent over the same period raised eyebrows.

Looking further ahead, economists at Santander also believe UK interest rates will remain between 3 per cent and 4 per cent for the foreseeable future.

Graham Sellar, head of intermediary channels at Santander UK, said: ‘While no-one has a crystal ball, as we edge towards the next MPC meeting and an expected 0.25 per cent cut to base, we can quietly assume that the ultra-low base rate of the last few years is now a thing of the past.

‘Instead, we move towards a new norm, where base rate not only falls to 3.75 per cent by the end of next year – but stays between 3 and 4 per cent for the foreseeable future.’

If the forecast proves correct, this will likely mean that mortgage rates will see little change going forward.

This is because at present, future interest rate cuts are already baked into fixed rate mortgage pricing.

This is why the lowest priced five-year fixed rate products are hovering just above 3.75 per cent, rather than closer to the Bank of England base rate at 5 per cent.

Graham Sellar adds: ‘While base rate doesn’t dictate mortgage rates, it can impact swap rates, which is what lenders pay to financial institutions to acquire fixed funding for a set period of time. 

‘This means those looking to purchase a property or remortgage may well see rates remaining relatively static compared to the volatility of recent years.’

Santander’s prediction is in stark contrast to Goldman Sachs. Economists at the Wall Street giant are now predicting UK interest rates will fall to 2.75 per cent over the course of the coming year.

This would involve the Bank of England cutting much more sharply than Santander or the wider market is currently pricing in.

Mortgage brokers have been out in force, voicing their concerns over the accuracy of Goldman Sachs forecast and worry this could influence borrowers decisions.

For example, people may opt for shorter term fixed deals or two-year trackers in the hope they’ll be able to take advantage when rates fall.

Dariusz Karpowicz, director at Albion Financial Advice, accused the investment banking company of playing crystal ball and warned that it shouldn’t be treated as ‘financial gospel.’

Karpowicz told the news agency, Newspage: ‘While their prediction of a 2.75 per cent base rate by next year is certainly eyebrow-raising, we must remember that economic forecasting is often as reliable as British weather.’

‘If rates were to drop that low, we could witness a property market revival that would make the roaring twenties look tame. 

‘Let’s not count our rate cuts before they hatch. If a week is a long time in politics, a year is an eternity in economics.’

Craig Fish, director at Lodestone Mortgages & Protection also thinks Goldman Sachs is way off the mark with its latest forecast.

‘If we see the base rate at 3.5 per cent, we’ll be lucky. The Bank of England is likely to adopt a much more cautious approach to avoid repeating past mistakes. 

‘Reporting such predictions is irresponsible and only exacerbates the situation. 

‘Consumers may be tempted to wait or hold on to the hope of these low rates materializing, but that’s highly unlikely. Their decisions based on this misinformation could have serious consequences.’

Justin Moy, managing director at EHF Mortgages also argues that a 2.75 per cent base rate by the end of next year is a bit extreme.

‘Achieving that would require some serious economic stagnation over the next 12 months,’ added Moy.

‘Unfortunately, the narrative around expected low rates significantly influences mortgage borrowers who are looking for solid guidance in making their decisions, especially when swap rates are on the rise and pushing fixed rates higher.’

Goldman’s latest UK prediction is based on its calculation of the ‘neutral’ rate of interest at which the economy can maintain the balance between low unemployment on one hand and inflation at its 2 per cent target on the other.

By that measure, the current Bank rate is ‘notably restrictive’, the analysis argues.

That means interest rates are still working to squeeze economic growth and crush inflation, even though inflation has now fallen below 2 per cent.

In a note to clients, Goldman said its analysis ‘thus reinforces our view that the Bank of England will ultimately lower rates more than priced by financial markets given continued progress on disinflation’.

It also pointed to ‘recent dovish commentary’. That is likely to be a reference to remarks by Bank of England governor Andrew Bailey, who said that it could be ‘a bit more aggressive’ in cutting rates if inflation remains under control.