Investment Bank Goldman Sachs has forecasted a gradual reduction in the Bank of England’s base interest rate (the Base Rate), predicting it will fall from 4.75% to 3.25% by the end of 2026. This represents a significant shift for the UK economy, which has endured high borrowing costs in the wake of rising inflation. The impact of this forecasted reduction on the economy will be substantial, including for the Scottish property market, where lower rates are likely to stimulate both buyer demand and investment.
Goldman Sachs’ Forecast: Rate Reductions Over Time
Goldman Sachs expects the Bank of England to start cutting rates next month, with an initial reduction bringing the base rate down to 4.5%. By the end of 2026, they expect the base rate to reach 3.25%, signalling the UK economy returning to more favourable borrowing conditions. However, they predict that this easing will be slow, with the Bank of England maintaining caution as it continues to monitor inflation, which, while declining, remains a risk.
The prediction of the Base Rate moving towards 3% reflects Goldman Sachs’ view that inflationary pressures will persist but should continue to ease, allowing the Bank of England to bring relief to mortgage holders and businesses without triggering a resurgence in inflation.
Impact on Borrowing and Investment
A reduction in interest rates will have widespread effects on borrowing and investment decisions for many. For borrowers, particularly those in Scotland’s high-end property market, lower rates mean reduced mortgage costs, offering relief after years of rising mortgage payments. As the cost of servicing mortgages decreases, buyers will no doubt feel more confident about moving forward with property purchases.
For investors, lower borrowing costs will also open up opportunities. In recent years, high interest rates have deterred some property investors, particularly those relying on financing to fund acquisitions or developments. The anticipated rate cuts will likely renew interest in the higher end of the property market, particularly in cities like Edinburgh and Glasgow and in areas like East Lothian and Fife, where property values continue to steadily rise.
Scottish Property Market Outlook
Scotland's property market, as long as the wider UK economy remains robust, will benefit from a lower rate environment. In 2022 and 2023, rising interest rates cooled demand in the Scottish property market, slowing price growth and making it more expensive for buyers to secure mortgages. If rates fall over the coming years, affordability will improve, potentially spurring new activity.
The high-end markets in Edinburgh and Glasgow have always been attractive to both local and international buyers, and lower interest rates will only serve to intensify demand. Buyers who delayed purchasing due to high borrowing costs may return to the market, while investors seeking long-term growth in resilient areas such as our main cities, will also find more appealing opportunities.
The reductions in rates will also benefit buy-to-let investors. The recent hike in interest rates significantly squeezed profit margins for many landlords, particularly those with variable-rate mortgages or who did not have limited company vehicles. Many investors will experience a recovery in yields, making investment properties in desirable areas more attractive again.
Potential Risks and Considerations
While the forecast of lower interest rates brings optimism and a generally positive sentiment to the property market, it’s important to be aware that the economy can be fickle. Inflation has been more persistent than expected in the past few months, and any shocks to energy prices or wage growth could alter the Bank of England’s course, delaying or reducing the scale of rate cuts.
Conclusion on Goldman Sachs' prediction
Goldman Sachs’ prediction of interest rates falling to 3.25% by the end of 2026 is welcome news for Scotland’s property market and its homeowners and investors. As borrowing costs decrease, buyer confidence and investment activity are likely to rise, particularly in high-demand regions and areas.
While the pace of change may be gradual, the medium to long-term outlook for the Scottish property market appears to me to be very positive, with reduced rates offering new opportunities for buyers, investors and developers alike.
