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UK interest rates will almost halve from their present rate of 5 per cent, according to top US investment bank Goldman Sachs.

Borrowing rates, set by the Bank of England, will sink to 2.75 per cent by the end of next year, Goldman predicts, suggesting a faster fall than borrowers and lenders have forecast.

The drop in rates will be welcome news to mortgage borrowers who have had a tough couple of years, although savers will be hit again.

Central banks typically use interest rates as a way to cut inflation since costlier borrowing reduces demand.

Financial markets currently suggest the Bank will cut to a rate of 3.5 per cent, but inflation in the UK has been tamed more quickly than thought, with the price of goods now rising at 1.7 per cent per year – below the Bank of England’s target of 2 per cent.

This easing of living cost pressure and a more relaxed stance from the Bank of England suggests faster rate cuts, Goldman said.

Goldman Sachs said that “slow productivity growth, falling prices of capital goods and population ageing” would hold rates down, while “sharply rising public debt and a pick-up in population growth” would keep them above the lowest values.

The Bank of England raised interest rates to 5.25 per cent last year, taking them to their highest rates since before the great financial crisis of 2007-8. It then cut lending rates to 5 per cent in August of this year.

Commercial lenders use the bank base rate as a guide on how much to charge borrowers and how much to reward savers.

Mortgage borrowers’ troubles began two years ago in the aftermath of Liz Truss’s disastrous mini-Budget, when her unfunded tax cuts sent shockwaves through financial markets and almost overnight mortgage costs rose.

The average two-year fixed-rate mortgage went from 3.66 per cent to 5.24 per cent, according to mortgage brokers London & Country.

Any cut in borrowing costs will also be welcome news to the Treasury and Chancellor Rachel Reeves, who is looking to borrow to invest, in an effort to grow the economy.

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