Will UK interest rates fall in 2026? Latest Bank of England predictions
The Bank of England held interest rates at 3.75% in their February meeting. Will interest rates stay at this level, or will they fall further this year?
Interest rates are still at their lowest level since February 2023 after the Bank of England (BoE) held interest rates at its February base rate meeting.
The central bank’s Monetary Policy Committee (MPC) narrowly voted to hold rates at 3.75% on 5 February following a cut in December at their last meeting of 2025.
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Andrew Bailey, governor of the Bank of England, effectively had the deciding vote to hold, but said in the meeting’s minutes “the risks from inflation persistence appear to have continued to reduce. I therefore see scope for some further easing of policy”.
This being said, Bailey added: “This does not mean that I expect to cut Bank Rate at any particular meeting. I will go into the coming meetings asking whether a cut is justified.”
The latest official inflation figures show price growth rose to 3.4% in December 2025 as higher prices over the Christmas period bucked the trend of plateauing or falling inflation since July 2025.
Inflation in December came in 0.2 percentage points higher than it was in November, data from the Office for National Statistics (ONS) showed, but most forecasters believe this rise will be short-lived.
Most forecasts, including projections by the BoE, predict inflation to keep falling closer to the 2% target this year, reaching it by early 2027. Disinflation will be aided by measures announced in the Autumn Budget, the Bank expects.
Does the Bank’s prediction that inflation will fall through 2026 mean we should expect another interest rate cut soon? We look at where interest rates could go in 2026.
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 BoE 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 that 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, coming in at 3.4% in December, the latest month for which we have data.
However most economic forecasts expect inflation to fall closer to target throughout 2026, potentially justifying rate cuts.
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 held at 5.1% in the three months to November, remaining at the highest it has been since January 2021.
At the same time, regular wage growth slowed slightly to 4.5% in the same period.
The overall UK economy is growing, albeit at an agonisingly slow rate, with the ONS reporting that GDP grew by just 0.3% in the three months to November.
Will interest rates fall further in 2026?
Since August 2024, the BoE has cut interest rates six times – roughly once a quarter, and each time by 25 basis points.
This cutting trend has brought the base rate down from a recent high of 5.25% in August 2024 to 3.75% in December 2025 and February 2026.
But while this approach prevailed in 2025, it is unclear whether the roughly quarterly cadence of rate cuts will continue or slow down in 2026.
What seems to be almost certain is that the MPC will cut rates at least once in 2026. In the minutes of their most recent meeting, the committee said: “On the basis of the current evidence, Bank Rate is likely to be reduced further. Judgements around further policy easing will become a closer call.”
They added that the extent and timing of potential future cuts will be subject to the outlook for inflation.
This effectively means that if the economic consensus is correct and inflation falls closer to target over the course of 2026, the Bank will likely cut interest rates – “In short, it looks like a rate cut is now a question of when, not if,” said Laith Khalaf, head of investment analysis at AJ Bell.
February’s decision was especially notable because of the division within the MPC – most economists expected a hold, but were surprised by how narrowly the motion passed.
Khalaf said the MPC’s decision was “a far more dovish result than was expected, especially when you consider that Andrew Bailey and Catherine L Mann voted to hold, but sound like they are close to nodding through a cut too”.
The increasingly dovish thinking of the MPC means that all eyes are now on next month’s meeting as forecasters think a cut in March has now become much more likely.
Sanjay Raja, chief UK economist at Deutsche Bank Research, explained: “[February’s] decision was a closer decision than we anticipated. With the vote tally coming in at 5-4, this was a finely balanced decision. Put simply, many on the MPC still see Bank Rate as overly restrictive amidst the current economic conjecture.”
He added that the Bank’s economic projections, which it published alongside February’s MPC meeting minutes, seem to back the dovish tilt in the committee as it lowered its CPI prediction. Other predictions also point to the Bank seeing a “larger accumulation of spare capacity in the economy.”
Finally, Raja notes that, with the economy starting to weaken, the MPC is finding it increasingly tricky to balance its objective of cutting inflation with the risks of constrictive monetary policy restricting economic activity.
Deutsche Bank predicts the central bank will cut rates twice in 2026, once in March and one final cut in June, bringing the bank rate to 3.25%.
Are we reaching the neutral rate of interest?
Following December 2025’s decision to cut rates to 3.75% and February’s decision to hold them at that level, there is an increasing sense among economists that the bank rate is edging closer to its neutral level – which is named R* (pronounced R-star).
R* is used to describe the natural real interest rate in an economy. Central bankers are concerned with estimating where R* is because it helps them work out whether monetary policy should be expansionary (help stimulate the economy, potentially increasing inflation) or contractionary (slow down the economy and pull down inflation)..
The tricky thing about R* is that it is, by nature, unobservable, so economists can only estimate where it is.
However, a consensus is building that the bank rate is now starting to come close to R*, meaning that more caution will be needed to make sure the central bank does not accidentally encourage more inflation by cutting interest rates too far.
It means MPC decisions this year could become more limited, as the bank is more constrained over whether or not it can push through a rate cut.
Following the December 2025 meeting, Raja said: “Bank Rate is inching its way towards a more 'neutral' policy setting. And the scope for more rate cuts is limited, with the Bank sending its more explicit message yet on the path for policy: ‘judgements around further policy easing will become a closer call’.”
This view has been sustained after the February hold, with Raja saying that Deutsche Bank estimates R* to be around 3.25% – the same level they expect the BoE to cut rates to this year.
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