What will happen to UK interest rates in 2026?
The Bank of England’s Monetary Policy Committee held interest rates for the fourth consecutive time in June. As inflation is set to rise in the UK, where will interest rates go next?
Interest rates will likely be held at 3.75% for the foreseeable future as policymakers continue their ‘wait and see’ approach to monetary policy in the wake of the Iran war.
In the latest meeting of the Monetary Policy Committee (MPC) on 18 June, interest rates were held for the fourth consecutive meeting, with the motion passing by seven votes to two.
This action was widely predicted by economists as we are still in a highly uncertain point – while the Iran war seems to be winding down with a memorandum of understanding set to be signed by the United States and Iran, much of the economic damage will persist even after hostilities cease.
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Inflation is expected to accelerate this year due to the impact the war has had on global energy prices and oil prices, meaning interest rate cuts are probably off the table for the time being.
The current environment is a far cry from where experts thought the economy would be this year. Before the war, most expected that inflation would fall sustainably this year, allowing the MPC to make several rate cuts in 2026.
How is inflation influencing interest rates?
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. This is because the Bank of England has a mandate to keep price growth under control.
The Bank’s inflation target, like that of most western central banks, is 2%, which economic consensus says is a healthy level of inflation in an economy that stimulates spending while keeping prices under control.
The main way the central bank works 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.
These are not the only two reasons why interest rates are moved, though. For example, rates might be lowered if economic growth is too slow, to help speed up the economy.
Inflation is currently above the 2% target and has been for quite some time. The latest official inflation figures showed the Consumer Prices Index (CPI) remained at 2.8% in the 12 months to May.
This was lower than forecasts by most economists, and was in large part due to May having the lowest level of food inflation in 17 months.
But despite the positive inflation figures in May, most economists expect inflation will rise over the course of 2026 as the UK economy contends with the inflationary shock caused by the Iran war.
Economists at the BoE say they now expect inflation to remain just below 3% for most of the year, but briefly rise to “a little over” 3.25% in the fourth quarter of 2026.
With forecasts showing that inflation is set to remain above-target for the rest of 2026, it is unlikely that the Bank of England will decide the environment is right for an interest rate cut.
The rest of the economic background
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.
The latest set of labour market data, published on 18 June, showed unemployment dipped slightly from 5% in the three months to March to 4.9% in the three months to April.
While a fall in unemployment is welcome, it is yet to be seen whether this is the start of a prolonged overall fall in joblessness.
At the same time, regular wage growth slowed to a near-six year slump. Regular earnings grew by 3.4% in the year to April, rising to 4.4% when including bonuses.
This was led by the public sector, where wages grew by 5.1% in the 12 months to April while private sector earnings grew by just 2.9% in the same period.
As for economic growth, the picture is not positive either.
The UK economy shrunk in the month to April, as GDP fell by 0.1% thanks to disruption from the Iran war, stoking fears that a recession may be around the corner.
This is a reversal from the economic recovery the UK was seeing in the first quarter of 2026, when GDP grew by 0.6%.
Will interest rates fall 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 0.25 percentage points.
That cutting trend brought the base rate down from a recent high of 5.25% to 3.75% in December 2025.
However, rates have remained on ice since then, with four consecutive meetings of the MPC deciding to keep rates at 3.75%, ending the roughly quarterly cadence of rate cuts we saw since the summer of 2024.
Economists were already doubting that quarterly rate hikes would continue in 2026 before the Iran war solidified it, speculating that the interest rates were getting closer to the UK economy’s neutral rate of interest.
Now, with the spectre of rising inflation once again stalking the UK, almost all economists think the MPC will keep rates at 3.75% for some time as they wait to see how much economic damage there is.
The next MPC meeting will take place on 30 July, and by that time we will have seen another month’s worth of economic data, showing where prices went in June and the state of the labour market and economic growth in May.
The committee will pour over this data and look at what it means for the future of interest rates.
If the figures show that the economic consequences of the war are in line with current expectations, then we can expect rates to stay held again.
But if inflation rises more than expected, we could see a rate hike to help contain price growth.
In the latest MPC meeting, two members (Huw Pill and Megan Greene) voted to hike rates as they believed it was needed to keep inflation under control as they assessed second-round inflationary effects to be more of a risk than the rest of the committee.
If the data shows Pill and Greene’s hypothesis is correct, we can likely see more MPC members vote for a hike.
This being said, the most likely scenario at the July MPC meeting is that rates will stay at 3.75% as the inflationary shock of the war is expected to be less extreme than the Bank’s April forecasts showed.
Economists at Deutsche Bank expect interest rates to be held at 3.75% for at least the rest of this year, with the possibility of rate cuts coming back on the table in spring 2027.
Sanjay Raja, chief UK economist at Deutsche Bank, said the economic data has so far given the MPC extra time to fully assess the situation before potentially moving interest rates.
He said: “With data more favourable than expected, and an Iran/US deal in place, the need to act swiftly has reduced. The MPC can let the dust settle before deciding on its next course of action with a full economic update and a more complete communication package in July.
“We expect Bank Rate to remain on hold through the remainder of the year. We still see the case for rate cuts to resume from spring next year. While we flagged one-sided risks to the interest rate outlook, developments – both domestically and geopolitically – have opened up more balanced risks to the monetary policy outlook.”
This is similar to the forecast from economics advisory firm Oxford Economics, which sees rates on ice until around late 2027. At that point, they believe the MPC could start cutting interest rates again.
Andrew Goodwin, chief UK economist at the firm, said: “On balance, we can’t see any reason to change our call that Bank Rate will remain at 3.75% for the rest of this year.
“The majority of the committee appear content to sit back and see how events play out, and we don’t expect to see leading indicators showing evidence of growing second-round effects that might trigger a change of heart.”
He added: “Our current baseline shows cuts resuming in late 2027, with the committee erring on the side of caution about underlying inflation pressures. But the chances of an earlier move are rising.”
An earlier cut would be reliant on a lasting peace being reached by the US and Iran, however.
