Will UK interest rates fall in 2026? Latest predictions

Governor of the Bank of England, Andrew Bailey, during the Bank of England financial stability report press conference,

When will UK interest rates fall further? Latest Bank of England predictions

(Image credit: WPA Pool via Getty Images)

Interest rates are now at their lowest since February 2023 after the Bank of England (BoE) delivered a rate cut at its final base rate meeting of 2025.

The central bank’s Monetary Policy Committee (MPC) narrowly voted to cut rates by 25 basis points to 3.75% by 5-4 on 18 December, with BoE governor Andrew Bailey casting the deciding vote.

Bailey said disinflation is now more established, supporting the case for a further cut to the base rate.

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The latest official inflation figures show price growth rose to 3.4% in December 2025 as higher prices over the Christmas period bucked the trend of plateauing or falling inflation since July 2025.

Inflation in December came in 0.2 percentage points higher than it was in November, data from the Office for National Statistics (ONS) showed, but most forecasters believe this rise will be short-lived.

Most forecasts, including projections by the BoE, predict inflation to keep falling closer to the 2% target this year, reaching it by early 2027. Disinflation will be aided by measures announced in the Autumn Budget, the Bank expects.

The MPC will meet this week to decide whether to raise, lower, or hold interest rates, with the decision being made public on Thursday 5 February.

Will December’s inflation figures mean the Bank will take a more cautious approach, or will we see another cut? We look at where interest rates could go in 2026.

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 that 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, coming in at 3.4% in December. However most economic forecasts expect inflation to fall closer to target throughout 2026, potentially justifying rate cuts.

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 held at 5.1% in the three months to November, remaining at the highest it has been since January 2021.

At the same time, regular wage growth slowed slightly to 4.5% in the same period.

The overall UK economy is growing, albeit at an agonisingly slow rate, with the ONS reporting that GDP grew by just 0.3% in the three months to November.

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.

But while this roughly quarterly approach prevailed in 2025, it is unclear whether this will continue in 2026.

Consensus seems to be that the MPC will not vote to cut rates on Thursday at its first meeting of the new year.

Laith Khalaf, head of investment analysis at AJ Bell, said: “It’s extremely unlikely the Bank of England is going to do anything but hold interest rates where they are at its February meeting. The Bank reduced rates in December and has clearly indicated it wants to adjust policy gradually, so consecutive cuts are pretty much unthinkable in the current economic environment.”

Khalaf added that changing rates at two consecutive MPC meetings would be especially surprising, as the last time this happened was in the summer of 2023 when the Bank was rushing to hike interest rates to combat rising inflation.

The last time two consecutive cuts were implemented was even further back, in the first quarter of 2020 when the Covid pandemic looked like it was going to decimate the economy.

“Nothing that dramatic is happening right now which justifies quick fire rate cuts,” Khalaf said.

Markets have only priced in a single rate cut in the first half of the year, with the picture beyond then looking much less certain.

This first cut is expected in April as we enter the new tax year. Khalaf explains: “April will be a key month because the government’s energy price subsidy will kick in, and inflation should fall back substantially.

“While the Bank of England is more focused on medium-term inflation expectations, it is inevitably easier to be a bit more dovish when inflation begins with a two rather than a three.”

Other forecasters think a second cut in 2026 could be on the cards.

Michael Saunders, senior economic advisor at Oxford Economics and a former MPC member, said: “We continue to expect that, with sluggish growth, rising unemployment and lower inflation, Bank Rate will fall to 3.25% at the end of [2026], with the next cut at end-April and another cut in H2.”

The prediction of two rate cuts in 2026 is echoed by Deutsche Bank, which said it expects one rate cut in March and one in June. It also expects the base rate to fall to 3.25% by the end of this year.

Are we reaching the neutral rate of interest?

Following December’s decision to cut rates, there is 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 that MPC decisions in 2026 could become more limited, as the bank is more constrained over whether or not it can push through a rate cut.

Sanjay Raja, chief UK economist at Deutsche Bank, said: “As we inch our way towards a more 'neutral' policy setting, we think policy divisions will narrow over 2026.

“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’.”

Saunders at Oxford Economics also notes that R* is becoming more important to MPC decisions.

He said: “The MPC’s language emphasises that further easing is likely but not definite, given that Bank Rate is approaching estimates of neutral, that neutral itself is uncertain, and that it would be preferable to avoid cutting too far and then having to reverse course.”

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Daniel is a financial journalist at MoneyWeek, writing about personal finance, economics, property, politics, and investing.

He covers savings, political news and enjoys translating economic data into simple English, and explaining what it means for your wallet.

Daniel joined MoneyWeek in January 2025. He previously worked at The Economist in their Audience team and read history at Emmanuel College, Cambridge, specialising in the history of political thought.

In his free time, he likes reading, walking around Hampstead Heath, and cooking overambitious meals.