Will UK interest rates fall in 2026? Latest Bank of England predictions
The Bank of England’s Monetary Policy Committee held interest rates in March. As the Iran war threatens the UK economy, what will happen to interest rates?
Sam Walker
Interest rates are on hold, for now, as policymakers take a wait and see approach – but what’s on the cards for the rest of 2026?
The Monetary Policy Committee (MPC) held the bank rate at 3.75% on 30 April, with policymakers voting by a majority of 8 -1.
The hold, which had been widely predicted by economists, was justified by the MPC within the “highly uncertain” context of the Middle East conflict, which has pushed up global energy prices.
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Scott Gardner, investment strategist at J.P. Morgan Personal Investing, said: “Policymakers will be wary of being caught on the backfoot once again [on interest rates] or over reacting and pre-empting what could be a short-term price shock. Buying time is the choice for now as uncertainty remains elevated.”
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 the Consumer Price Index (CPI) measure rose by 3.3% in the 12 months to March 2026.
April’s data is due to be released on 20 May.
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 effectively redundant due to the outbreak of conflict in the Middle East.
The inflationary outlook for the UK is much worse than predicted before the war began, 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 and a significant portion of the world’s liquefied natural gas (LNG) is transported.
With supply drastically falling, the price of oil has soared, which has had a knock-on effect on the price of petrol and diesel. The latest figures from the RAC show, as of 29 April, petrol prices have risen by 24.3p per litre since 28 February, and diesel has risen by 46.5p per litre.
The wholesale energy market has also been thrown into turmoil, with the price of liquified natural gas spiking. This is expected to filter through to domestic energy bills from July, when the new Ofgem price cap comes into effect.
The latest forecasts from consultancy Cornwall Insights, which is well-regarded for its predictions, suggest the price cap will rise to £1,849 per year in July, an increase of 12% (£208) from the current cap.
The prediction was made based on figures from the end of 30 April.
To put that in context, prior to the conflict, the consultancy was forecasting the July price cap would be £1,645.
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 21 April, showed unemployment was at 4.9% in the three months to February, down slightly from 5.2% in the three months to January.
At the same time, regular wage growth slowed slightly to 3.6% in the three months to February.
Despite sluggish GDP growth toward the end of 2025, the economy seems to have rebounded slightly in early 2026, with GDP growing by 0.5% in the three months to February.
However, growth is expected to turn tepid as the year goes on due to the conflict in the Middle East. The International Monetary Fund (IMF) recently downgraded its UK growth forecasts for 2026 to 0.8%, down from the 1.3% prediction it made in January.
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.
It is unlikely the roughly quarterly cadence of rate cuts seen in 2025 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 public statements and interviews since the start of the conflict, Andrew Bailey, governor of the Bank of England, has reiterated this. He stressed to the BBC on 16 April how there are "difficult judgements to be made” on where interest rates go next.
This is a drastic change to the language the MPC was using before the war when it was heavily indicating it intended to cut rates in 2026.
Meanwhile, in its April report, the MPC sounded the alarm over the potential for future inflationary shocks. It outlined three scenarios which could occur due to rising energy prices caused by the conflict.
In the worst-case scenario C, inflation could hit 6.2% in the first three months of 2027. Even under the best-case scenario A, inflation would reach 3.6% by the end of 2026.
Should inflation breach 6% next year, interest rates would need to rise to around 5.25% to combat it – 1.5 percentage points higher than now.
Most economists’ predictions for future interest rates are more gloomy than they were at the start of the year as well, at least in the immediate term.
Pantheon Macroeconomics expects interest rates to be hiked twice in 2026, followed by three cuts in 2027.
Meanwhile, Oxford Economics is forecasting the MPC to keep the bank rate unchanged in 2026.
