Goldman Sees a Messier U.K. Furlough End Delaying BOE Rate Hike

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A messier end to the U.K. furlough program than the Bank of England expects will prompt the central bank to delay raising interest rates, according to Goldman Sachs Group Inc.

While investors expect the BOE to hike its benchmark rate in May, with 28 basis points of cumulative increases by the end of 2022, economists at Goldman Sachs don’t anticipate borrowing costs will rise until the third quarter of 2023. 

That’s because the U.S. bank judges that there’s more slack in the economy than the BOE estimates, and its U.K. chief economist Steffan Ball said the situation could worsen when the government’s wage-support program ends on Sept. 30.

The outlook for the jobs market will play a key role in deciding when will the BOE start raising borrowing costs from the current record-low of 0.1%. Governor Andrew Bailey told lawmakers on Wednesday that he is among officials who think a minimum criteria for tighter U.K. monetary policy has been met.

“We’re more concerned [than the BOE] that there might be some disruption -- that some of those people on furlough won’t immediately find jobs and will end up being in the unemployment pool,” Ball said in an interview. 

Official data show that the number of people coming off job support has been declining each month -- from 550,000 in June to 340,000 in July -- with reliance on furlough highest in industries still struggling to get back to normal. “That’s a little concerning,” said Ball.

Goldman forecasts that the unemployment rate will peak at 5.5% in the second half of the year, unlike the central bank which expects a gradual decline. The excess capacity means less inflationary pressures, and therefore less need for a more imminent rate hike.

A former special adviser to Sajid Javid, the Health Secretary, when he was Chancellor of the Exchequer, Ball added that the budget on Oct. 27 is likely to be “fairly expansionary.”

He expects Sunak to announce about 60 billion pounds ($83 billion) of spending. “While we’ve had a lot of talk about leveling up and it was one of the key messages of the Queen’s Speech, we haven’t had a lot of new money promised for things like skills or digital networking.”

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