Interest rate cut expectations change! Will the Federal Reserve and the Bank of England "pause rate cuts" together in December?

According to the Zhitong Finance APP, Wall Street financial giant Goldman Sachs released a report on Thursday stating that the institution currently expects the Bank of England (BoE) to maintain the benchmark interest rate in December, rather than the continuous rate cuts previously predicted by Goldman Sachs. Following what Goldman Sachs economists referred to as a "more expansionary" UK budget tone, they revised their earlier dovish forecast of a 25 basis point rate cut. According to the latest probability of rate cuts shown by the CME FedWatch Tool, the likelihood of the Federal Reserve "pausing rate cuts" in December has significantly increased, as the US job market remains strong and consumer spending continues to expand. Some traders in the interest rate futures market are betting that the Federal Reserve will pause rate cuts in December, with a very small number even betting on a pause in November.

Goldman Sachs economists stated in a recent report: "The positive outlook for strong economic growth in 2025 may significantly reduce the urgency for consecutive rate cuts in the near term." "Although there is still a possibility of a continued rate cut process if economic data shows a significant unexpected decline, especially in inflation, from now until December, we now believe that the likelihood of the Bank of England announcing a pause in rate cuts in December is greater."

It is understood that UK Chancellor of the Exchequer Rachel Reeves announced the largest tax increase in the UK in thirty years during her first budget outline on Wednesday, stating that the fiscal system under her leadership must repair the country's nearly broken public services through substantial spending.

In addition, the UK Debt Management Office (DMO) stated on Wednesday that it will issue £297 billion in government bonds for the 2024-2025 fiscal year, exceeding the £293 billion estimate derived from a survey of 16 bond traders by foreign media.

Given the previous market communication principles and the progress in combating inflation in the UK being faster than market expectations, Goldman Sachs continues to expect the Bank of England to announce a 25 basis point rate cut at the November rate meeting, with a "pause in the rate cut process" expected in December. It is anticipated that a series of rate cuts will begin in February next year, with Goldman Sachs forecasting that the Bank of England may lower the benchmark interest rate to 3% by November next year (previously predicted at 2.75%).

At the same time, Goldman Sachs has slightly raised its forecast for the UK's GDP growth in 2025 from 1.5% to 1.6%, and expects that due to the increase in GDP scale, demand may rise, leading to a moderate increase in UK inflation levels in the future.

Currently, market confidence in the Federal Reserve continuing its rate cut process in December is gradually weakening, with a group of interest rate futures traders beginning to bet on the Federal Reserve "pausing rate cuts" in December, and even a very small number of traders betting on a pause in November.

Following the unexpectedly high "small non-farm" data—namely the ADP employment data release—interest rate futures traders are still generally betting on a 25 basis point rate cut by the Federal Reserve in November, but some traders have shifted to betting on a "pause in rate cuts" announcement in December, with even fewer traders betting on a pause in November. The CME FedWatch Tool shows that the interest rate futures market continues to bet on a 25 basis point rate cut in November, with a probability as high as 95%, but the probability of no rate cut in November has risen from 0 to 5%. More and more traders are betting that the Federal Reserve will maintain the benchmark interest rate in December, as indicated by the CME FedWatch Tool, following the unexpectedly high ADP employment data and the preliminary GDP data suggesting continued expansion of the US economy In December, the probability of the Federal Reserve not lowering interest rates surged from 0 before the release of the ADP data to over 30%, with the probability once approaching 40%.

The continuously stronger-than-expected non-farm employment market and resilient consumer spending data have significantly boosted expectations for a "soft landing" of the U.S. economy, but they have also gradually cooled expectations for interest rate cuts by the Federal Reserve. Some economists have stated that strong economic data may prompt the Federal Reserve to pause the interest rate cut process in November or December this year, rather than the continuous cuts that had been anticipated for a long time this year