Will UK interest rates fall in 2026? Latest Bank of England predictions

Interest rates were held at 3.75% on 19 March as the inflationary impact of war in Iran scuppered hopes of a rate cut in the UK.

The Bank of England’s Monetary Policy Committee (MPC) unanimously voted to hold rates, a move that was widely predicted by economists since the start of the US-Iran war on 28 February.

Before the outbreak of the war, most analysts expected interest rates to keep falling in 2026, but the market now thinks a rate hike could even be on the cards.

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The main reason rate cuts have been halted is the Iran war has the potential to do serious damage to the UK economy.

Inflation is expected to climb, fuelled by the constrained supply of oil in the Strait of Hormuz, a narrow sea passage between Iran and Oman, through which around 20% of the world’s oil is transported.

That has led to a rise in the price of petrol and diesel, with the latest figures from RAC showing petrol prices have spiked by just under 14.4p per litre since 28 February, and diesel has risen by more than 28.8p per litre.

The wholesale energy market has also been thrown into turmoil, with the price of liquified natural gas spiking. We look at what it could mean for energy prices in a separate piece.

If the conflict is sustained and prices remain high, the inflationary outlook for the UK could be much worse than predicted less than a month ago.

We look at where interest rates could go next, and what war in the Middle East means for future MPC meetings.

The economic backdrop

The MPC uses economic data to help inform its interest rates decisions.

One of the most important economic metrics used by the MPC is the rate of inflation as the Bank of England has a mandate to keep price growth under control.

The Bank’s inflation target, much like that of many central banks, is 2%, which economic consensus says is a healthy level of inflation in an economy.

The main way the central bank tries to achieve this goal is by increasing or decreasing interest rates.

Broadly speaking, when inflation is too high, the MPC will raise interest rates, and when it is too low it will lower them.

Inflation is currently above the 2% target. The latest official inflation figures showed price growth fell to 3% in January.

Before the war broke out, most economic forecasts expected inflation to fall closer to target throughout 2026, bolstering the case for further rate cuts. But those inflation forecasts are now out of date.

As inflation data is reported at a one month delay, neither the January data nor the upcoming inflation data for February, which will be published on Wednesday 25 March, will reflect the inflationary consequences of the Iran war.

We will only see this reflected in March’s data, due to be released on 22 April.

See our article ‘UK inflation forecast: where are prices heading next?’ for more on the latest inflation forecast.

Inflation is not the only data the MPC examines to make base rate decisions. Another key metric is the state of the labour market.

In the orthodox view of economics, a softer labour market with higher unemployment and poor wage growth is a disinflationary pressure in the economy, while strong wage growth and full employment drives up inflation.

In the latest set of labour market data, the ONS reported that unemployment remained at a five-year high of 5.2% in the three months to January 2026.

At the same time, regular wage growth slowed slightly to 3.8% in the same period.

The overall UK economy is growing, albeit at an excruciatingly slow rate, with the ONS reporting that GDP flatlined in the three months to January.

Will interest rates fall further in 2026?

Between August 2024 and December 2025, the Bank of England cut interest rates six times – roughly once a quarter, and each time by 25 basis points.

That cutting trend brought the base rate down from a recent high of 5.25% to 3.75%.

But while this approach prevailed in 2025, it now seems much less likely the roughly quarterly cadence of rate cuts will continue in 2026.

This was already in doubt before the war, when most economists expected around two rate cuts in 2026 as interest rates came closer to the economy’s neutral rate of interest – half as many as in the year before.

Now, the Iran war has scuppered most hopes of falling rates in 2026 as the country braces for another period of heightened inflation.

In the minutes for their March meeting, the MPC said: “The Committee will continue to closely monitor the situation in the Middle East and its impact on global energy supply and energy prices. It stands ready to act as necessary to ensure that CPI inflation remains on track to meet the 2% target in the medium term.”

The Bank’s own estimates now say inflation will reach around 3.5% in the third quarter of the year, mostly because of increases to energy bills, both for households and businesses.

They added that even if the Iran war ends quickly, the energy supply would still “take time to recover”, pushing up prices.

The committee said: “Efforts to rebuild stocks, as well as greater awareness of vulnerabilities in the global energy network, could sustain higher oil and gas prices. Distributions implied by financial market options also suggested that upside risks to oil and gas prices had increased significantly, at least over the next few months.”

With inflation expected to rise, it is highly unlikely that the MPC will lower rates any time soon, as a cut to the base rate will exacerbate inflationary pressures on the economy.

So where will rates go next? Most economists think they will remain where they are for the foreseeable future.

Sanjay Raja, chief UK economist at Deutsche Bank, said the MPC is now on a “wait-and-see” footing, observing the impacts of the war and getting ready to step in if needed.

He said: “The MPC's message was simple: ‘All members stood ready to act as necessary to ensure that CPI inflation remained on track to meet the 2% target in the medium term.’ The Bank's easing bias was removed.

“Any talk of rate cuts was pushed to the back-burner. And despite increasing trade-offs between growth and inflation, the MPC has given itself enough optionality and flexibility to move policy in either direction – a big shift from February.”

Deutsche Bank had previously expected two interest rate cuts in 2026, the first of which would have been in March, but this prediction has now been revised.

The bank no longer thinks there will be any rate cuts this year, with the base rate remaining at 3.75% until at least the start of 2027.

Raja said the prospect of rate hikes “can no longer be discounted” as the measure is now firmly on the table if the war drags on beyond April.

Meanwhile, consultancy Oxford Economics agrees that interest rates will be held until at least the end of this year and possibly beyond.

Their new prediction says interest rates will not be cut until at least the third quarter of 2027, at which point they predict a 25 basis point cut.

Andrew Goodwin, chief UK economist at Oxford Economics, said: “We think the most likely outcome is that the MPC settles into a long period of unchanged rates.

“If our oil and gas price assumptions are in the right ballpark, given the concerns about inflation expectations we think the committee will be reluctant to loosen policy again until three factors align: headline inflation has dropped back to the 2% target; there are signs that core inflation is under control; and the MPC is content that pay growth is close to a target-consistent pace. Under our baseline forecast, these conditions would only be satisfied in H2 2027.”