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 as the Iran war continues to disrupt the world economy.
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 there is still significant uncertainty on global economic conditions with the Iran war continuing to disrupt oil and gas markets as well as wider trade through the Middle East.
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Though inflation has slowed or stayed the same since March, it is still expected to accelerate before the end of the year. Inflationary pressures come in large part from higher 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 boost 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) dipped to 2.6% in the 12 months to June.
This was lower than forecast by most economists, and was in large part due to falling motor fuel prices after the Iran war paused. June also saw the lowest level of food and non-alcoholic drink inflation since August 2024 at 1.7%.
But despite the positive inflation figures in June, most economists expect inflation will accelerate over the course of 2026 as the UK economy contends with the inflationary shock caused by the Iran war.
Economists at the BoE said on 18 June 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 21 July, showed unemployment held at 4.9% in the three months to May for the second month in a row..
At the same time, regular wage growth remained at a six-year low. Regular earnings held at 3.4% in the three months to May, rising to 4.3% when including bonuses.
This was led by the public sector, where wages grew by 5.5% in the three months to May 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 grew by just 0.1% in the month to May, reversing a 0.1% drop in GDP in the month prior thanks to the impacts of the Iran war.
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.
While the Iran war is the driving reason for the MPC to keep rates at 3.75%, economists had been doubting whether quarterly rate hikes would continue in 2026, speculating that the interest rates were getting closer to the UK economy’s neutral rate of interest.
Now, with forecasts showing inflation is expected to rise above 3% by the end of the year, almost all economists think the MPC will keep rates where they are for some time as they wait to see how much economic damage there is.
The next MPC meeting will take place on 29 July and the decision will be announced on 30 July.
At this meeting, the committee will look at the latest economic data and forecasts and consider what they mean for the future of interest rates.
As most economic indicators are in line or below the Bank’s previous forecasts, we can expect the MPC to keep rates at 3.75%. Considering that almost all economists agree that inflation will rise this year, a rate cut is very unlikely.
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.
In particular, he said the latest dip in inflation “will buy the MPC more time as it deliberates on where to peg monetary policy”.
However, he said the dip is unlikely to push the MPC to cut interest rates.
“To be sure, the UK will see inflation push higher from here – potentially pushing closer to 3.3% -3.5% year on year in Q4-26 as base effects, food price rises and energy price rises catch up with households. This, we think, will continue to keep any prospect of rate cuts off the table for now, while allowing the MPC to retain its slight hawkish bias.”
Economics advisory firm Oxford Economics agrees that the MPC is likely to continue its “wait-and-see” approach to rate-setting as renewed hostilities between Iran and the US continue to complicate the economic picture.
The firm expects the MPC to hold rates at 3.75% and for the motion to pass with seven votes to hold and two votes to raise.
Alexander Harvey, UK economist at Oxford Economics, said: “Oil and gas prices have risen in recent weeks, which will concern some members. But inflation expectations have softened, and inflation and pay growth have been weaker than the BoE expected.
“This will allow the Bank to maintain its existing wait-and-see approach at the July meeting.”
