Will UK interest rates fall in 2026? Latest Bank of England predictions
The Bank of England’s Monetary Policy Committee held interest rates at 3.75% in its February meeting. After conflict broke out in the Middle East, what will happen to interest rates?
Interest rates are still at their lowest level since February 2023 after the Bank of England (BoE) held interest rates at its latest 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 its last meeting of 2025.
Article continues belowTry 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
As recently as the end of February, most forecasters expected inflation to swiftly drop to around the 2% target in early 2026, clearing the path for potential further interest rate cuts.
However, these predictions were thrown in the air when conflict broke out in the Middle East on 28 February, which could cause a spike in prices. We look at what it could mean for the price of energy in a separate piece.
The price of oil has also already spiked, climbing to around $100 per barrel of Brent Crude – the highest level since 2022, after Russia’s invasion of Ukraine.
That has, in turn, 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 9.5p per litre since 28 February, and diesel has risen by more than 19.7p per litre.
If the conflict is sustained and prices remain high, the inflationary outlook for the UK could be much worse than predicted just weeks ago.
With the MPC set to announce its latest interest rates decision on Thursday, we look at where interest rates could go next, and whether war in the Middle East could lower the chances of a rate cut.
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 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, a sharp drop from the 3.4% reported in December by the Office for National Statistics (ONS).
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 these inflation forecasts are now out of date.
Neither the January data, nor the upcoming inflation data for February, will reflect the inflationary consequences of the Iran war. That means the Bank is less able to use falling inflation in January (and predicted falling inflation in February) to justify a rate cut.
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 climbed to 5.2% in the three months to December 2025, rising to a five-year high.
At the same time, regular wage growth slowed slightly to 4.2% 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?
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 now seems much less likely the roughly quarterly cadence of rate cuts will continue in 2026.
The elephant in the room at the next MPC meeting will be the war in the Middle East and the impact it is having on the UK economy.
One aspect of this that the MPC will be monitoring is how the war is affecting the energy market.
It has already led to a surge in oil prices, which will in turn lead to an increase in the price of petrol, diesel, energy, and much more. Volatility in the region has also led to a spike in the cost of natural gas.
These will all serve as inflationary pressures on the economy as almost everyone in the country is impacted by fluctuations in the price of energy. It is also a key input cost for most businesses, so higher energy prices push up the cost of almost everything we buy.
As a result of this, most forecasters expect the MPC to hold rates on Thursday – despite most having expected a cut before the war started.
Cutting rates at a time like this, the argument goes, would be too risky and potentially exacerbate the upwards inflationary pressure already present in the economy.
Sanjay Raja, chief UK economist at Deutsche Bank, said: “The MPC won't be rushed into a rate cut on 19 March. Geopolitical events have clouded the economic outlook.
“A couple of weeks ago, a March rate cut seemed inevitable to us. Fast forward to today, however, geopolitical events have raised some serious upside risks to inflation. The disinflation path no longer looks assured. Inflation expectations could see a further ratcheting up given the sensitivity to household expectations and energy prices.
“We expect the MPC to indicate a ‘wait-and-see’ approach until the dust settles on the Iran shock.”
Most economic forecasters agree with this. Edward Allenby, senior economist at Oxford Economics, expects rates to remain at 3.75%, saying: "Against this backdrop, it's almost certain that the MPC will keep Bank Rate unchanged at 3.75% at the March meeting.
“If the shock proves short-lived and recent price rises fully reverse, we still think there's a reasonable chance that the MPC will resume its cutting cycle either in April or June. However, if the surge in energy prices persists or goes higher, the MPC will be set for an extended pause.”
While there has been some discussion about the possibility of the MPC hiking rates on Thursday, most economists think this would be an over-reaction to the current situation.
Allenby added: “Given that policy remains restrictive, we don't expect a majority of committee members to support hiking the Bank Rate unless there is a substantial increase in inflation expectations.”
Are we reaching the neutral rate of interest?
Another thing the MPC will be concerned about in their next meeting is how close UK interest rates are to their neutral level.
This was already a topic of discussion among analysts before the outbreak of war. Following the December 2025 rate cut and the February hold, there was 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.
