Economy 4 min read By Alice Ashford
Goldman Sachs Lifts Gilt Yield Forecast as Energy Prices Delay Rate Cuts
Goldman Sachs has raised its forecast for UK government bond yields, warning that higher energy prices will keep inflation elevated and delay any Bank of England interest rate cuts, pushing up borrowing costs across the economy.
Goldman Sachs has increased its forecast for UK government bond yields, citing a renewed rise in energy prices that is expected to keep inflation above target for longer and postpone any reduction in interest rates by the Bank of England. The revision underscores growing concern in financial markets that the path to lower borrowing costs will be slower than previously hoped, with knock-on effects for mortgages, business loans and public finances.
The US investment bank now expects the yield on 10-year gilts to end the year at a higher level than it had previously projected, reflecting a reassessment of the inflation outlook. Energy prices, which had appeared to be easing earlier in the year, have rebounded in recent weeks, feeding through to household bills and industrial costs. That dynamic complicates the Bank of England’s task as it seeks to bring inflation back to its 2 per cent target without tipping the economy into recession.
Rate-cut expectations have been a key driver of gilt yields in recent months. When investors believe the central bank will lower rates sooner, bond yields typically fall, reducing the cost of government borrowing and easing pressure on mortgage lenders. Goldman’s revised forecast suggests that those hopes are now being pushed further into the future, with the first cut potentially delayed until later in the year or even into 2025. The bank’s analysts pointed to the persistent strength in energy markets as a central factor in their decision.
The shift has implications beyond the bond market. Higher gilt yields feed directly into the pricing of fixed-rate mortgages, corporate bonds and consumer credit. For the UK government, which is already grappling with stretched public finances, an increase in borrowing costs adds pressure to an already tight fiscal position. The Treasury has been relying on falling inflation and lower rates to create headroom for potential tax cuts or spending increases ahead of an expected general election.
Market participants have been closely watching energy prices, particularly oil and gas, as a key risk to the disinflation narrative. Geopolitical tensions in the Middle East and disruptions to shipping routes have contributed to volatility in commodity markets, while a colder-than-expected winter in parts of Europe has increased demand for heating fuels. These factors have combined to keep wholesale energy costs elevated, which eventually pass through to consumer prices.
The Bank of England’s Monetary Policy Committee has repeatedly stressed that it needs to see sustained evidence that inflation is returning to target before it can consider cutting rates. While headline inflation has fallen from its peak, services inflation and wage growth remain stubbornly high, adding to the case for caution. Goldman’s revised forecast aligns with a broader market repricing, as traders scale back bets on early easing.
For businesses, the prospect of prolonged high borrowing costs is unwelcome. Many firms have already delayed investment decisions or refinanced debt at higher rates, squeezing margins. Consumers, meanwhile, face the reality that mortgage rates may not fall as quickly as hoped, keeping pressure on household budgets. The housing market, which showed signs of stabilising earlier this year, could see renewed weakness if affordability remains stretched.
Goldman’s move is likely to be followed by other banks and forecasters adjusting their own expectations. The precise timing of any rate cut remains uncertain, but the direction of travel is clear: energy prices are once again a decisive factor in the UK’s monetary policy outlook, and their persistence could keep gilt yields higher for longer.
