What will happen to UK interest rates in 2026?
The Bank of England’s Monetary Policy Committee held interest rates in April. As the Iran war continues to threaten the UK economy, where will interest rates go next?
Expectations of interest rate cuts in 2026 have long since faded with Bank of England policymakers likely to keep rates on hold as they wait to see how the Iran war impacts the UK economy.
In the April meeting of the Monetary Policy Committee (MPC), interest rates were held at 3.75%, with the motion passing by eight votes to one.
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, oil prices, and prompted a wider acceleration in inflation too.
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The current environment is a far cry from where most experts thought the economy would be this year. Most previously 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 parliamentary 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 that stimulates spending.
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, though these are not the only two reasons why interest rates are moved.
Inflation is currently above the 2% target. The latest official inflation figures showed the Consumer Price Index (CPI) measure fell from 3.3% to 2.8% in the 12 months to April 2026.
This was largely because of a cut to domestic energy bills from the government, as well as negative base effects resulting from abnormally high inflation readings in April 2025.
Before the war in Iran broke out on 28 February, most economic forecasts expected inflation to fall closer to target throughout 2026, bolstering the case for further rate cuts.
But the inflationary outlook for the UK is no longer bright.
The world economy is still struggling with a constrained oil supply as the Strait of Hormuz, a narrow sea passage between Iran and Oman through which around 20% of the world’s oil and gas (LNG) is transported, continues to be blockaded.
With supply drastically falling, the price of oil has soared, which has had a knock-on effect on prices in general, but particularly on the price of a litre of petrol and diesel.
The latest figures from the RAC show, as of 11 June, petrol prices have risen by 23.9p per litre since 28 February, and diesel has risen by 36.4p per litre.
Meanwhile, the wholesale energy market has also been thrown into turmoil, with the price of liquified natural gas spiking.
While households are shielded from this for the time being, domestic energy prices for millions of people will rise by around 13% from July, when the new Ofgem price cap for Q3 comes into effect.
The latest forecasts from consultancy Cornwall Insights, which is well-regarded for its predictions, suggest the price cap will rise again in the final quarter of 2026 by around 2%.
Ultimately, as the outlook is not looking good, it is unlikely that the Bank of England will decide the inflationary 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 19 May, showed unemployment rose to 5% in the three months to March, up slightly from 4.9% in the three months to February.
At the same time, regular wage growth slowed to 3.4%, the slowest rate for six years, in the three months to March.
The data that has bucked the depressing trend is GDP growth. UK GDP impressed economists in the first quarter of the year, as the economy grew by 0.6% in the three months to March.
This data made some commentators wonder whether the UK economy started to rebound before the Iran war began, but most experts, including those at the International Monetary Fund (IMF), now expect the economy to grow slower.
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.
Experts are almost certain that a roughly quarterly cadence of rate cuts will not continue in 2026.
This was already in doubt before the war, when most economists expected just 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 economic disruption from the Iran war has scuppered most hopes of falling rates in 2026 as the country braces for another period of heightened inflation.
The next MPC meeting will take place on 18 June, and most experts, including those at Pantheon Macroeconomics and Deutsche Bank, expect that interest rates will be held at 3.75% for the fourth meeting in a row.
Danni Hewson, head of financial analysis at AJ Bell, said: “The majority of the Bank of England’s rate setters are expected to stay firmly on the fence during next week’s MPC meeting, keeping interest rates on hold at 3.75%.
“Even if next Wednesday’s inflation data shows the anticipated uptick in prices, a sluggish economy, a weak labour market and a boatload of uncertainty are expected to persuade all but the most hawkish members that the best move is no move at all.”
As for where interest rates will go in the second half of 2026, much depends on where inflation goes.
Alongside its April decision, the MPC published their quarterly monetary policy report which 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.
With inflation this high, many economists would say it would be reckless to cut interest rates and risk making the inflation problem even worse than it already is.
Indeed, some experts are speculating that interest rates could rise this year to help combat inflation. The market expects rates will rise to almost 4.5% in the next year, though few economists think rates will rise this much.
