Will Interest Rates Go Up in 2026? What the Bank of England Might Do Next

Will Interest Rates Go Up in 2026? What the Bank of England Might Do Next

If you're a homeowner, a first-time buyer, or someone thinking about remortgaging in the next twelve months, the question of where interest rates are heading is probably never far from your mind. After a bruising few years of elevated borrowing costs, many borrowers were cautiously optimistic that 2025 would bring meaningful relief. But as 2026 approaches, the picture has grown considerably more complicated — and the Bank of England finds itself caught between two equally uncomfortable choices.

Below, we break down the Monetary Policy Committee's (MPC) dilemma, what the competing economic forces mean in practice, and — crucially — what each scenario could mean for your mortgage.

Where Interest Rates Stand Right Now

After holding Bank Rate at a sixteen-year high of 5.25%, the MPC began cautiously cutting rates in August 2024. According to Bank of England data, Bank Rate stood at 4.50% as of February 2025, following a series of quarter-point reductions. Markets had, for much of late 2024, priced in an aggressive cutting cycle throughout 2025 and into 2026. Those expectations have since been tempered significantly.

The reason? Inflation has proved stickier than almost anyone anticipated, global trade risks have escalated sharply, and the geopolitical backdrop remains deeply unsettled. The MPC is now navigating one of the trickiest monetary policy environments in a generation.

The Inflation Stickiness Problem

Core inflation — which strips out volatile food and energy prices — has remained stubbornly elevated in the UK. Data from the Office for National Statistics (ONS) showed services inflation running well above the Bank of England's 2% target well into 2025, driven primarily by wage growth and persistent price pressures in sectors such as hospitality, insurance, and professional services.

This is the MPC's central frustration. The bluntest tool available — keeping rates higher for longer — risks throttling an already sluggish economy. But cutting too quickly risks allowing inflation to re-accelerate, destroying the credibility the Bank has worked hard to rebuild since the 2021–2023 inflation surge.

Governor Andrew Bailey has repeatedly emphasised a "cautious and gradual" approach to rate cuts, and the minutes from recent MPC meetings reveal a committee that is genuinely split on the pace of easing. Several members have expressed concern that market expectations for cuts may be running ahead of what the data justifies.

Trumpflation: The Global Trade Wild Card

Compounding the domestic picture is what economists have begun calling "Trumpflation" — the inflationary impact of sweeping US tariff policies introduced under the Trump administration's second term. Broad tariffs on imported goods, particularly from China and the European Union, risk re-wiring global supply chains and pushing up the cost of goods worldwide.

For the UK, the risks are twofold. First, higher import costs feed directly into domestic inflation, potentially forcing the MPC to keep rates elevated even as the economy slows. Second, a global slowdown triggered by trade fragmentation — which bodies including the International Monetary Fund (IMF) have warned could shave meaningful percentage points from global GDP growth — would reduce demand for UK exports and weigh on business investment.

This creates a nightmarish stagflationary scenario: slow growth and persistent inflation simultaneously. It's the one combination that makes the MPC's job almost impossible, because the appropriate response to each problem is the exact opposite of the other.

Middle East Conflict and Energy Price Risk

Beyond transatlantic trade friction, ongoing instability in the Middle East — particularly disruption to shipping routes through the Red Sea and heightened tensions in the broader region — continues to pose upside risk to energy prices. Oil and gas costs feed into virtually every corner of the economy, from fuel at the pump to manufacturing costs to household energy bills.

A significant escalation in Middle East conflict could push energy prices sharply higher, adding another layer of inflationary pressure that the Bank of England would have little power to directly control but would still be expected to respond to.

The Two Scenarios for 2026: What Could Happen

Scenario One: Gradual Rate Cuts Continue

In the more optimistic scenario, domestic wage growth moderates through 2025, services inflation drifts back towards target, and global trade disruption proves less severe than feared. In this case, the MPC is likely to continue cutting Bank Rate at a gradual pace — perhaps reaching somewhere between 3.50% and 4.00% by end of 2026.

For mortgage borrowers, this would translate into modestly lower mortgage rates, particularly on tracker and variable products. Two and five-year fixed rates would likely edge downward, though the reductions may feel disappointingly small compared to what many borrowers hoped for when rates first started to fall.

Scenario Two: Rates Stall — or Even Rise

In the more uncomfortable scenario, a combination of sticky domestic inflation, a global trade shock, and an energy price spike forces the MPC to pause its cutting cycle entirely. A minority of economists have not ruled out the possibility of a rate rise in 2026 if inflation re-accelerates materially — particularly if a weaker pound (driven by global risk-off sentiment) pushes up import costs further.

For borrowers, this scenario would be painful. Anyone coming off a fixed rate deal in 2026 expecting substantially lower rates could find the available deals are not much cheaper — or in a worst case, marginally more expensive — than their current arrangement.

What This Means for Mortgage Borrowers

The honest answer is that the outlook for 2026 is genuinely uncertain — more so than at any point in the recent cutting cycle. Here's what different types of borrowers should be thinking about:

• Remortgaging borrowers: If your deal expires in 2026, don't wait for rates to fall further before acting. The risk of rates stalling or reversing means that waiting could cost you. Use our mortgage calculator to model different rate scenarios and plan your budget accordingly. Our remortgaging guide covers everything you need to know about timing your switch.
• First-time buyers: Affordability remains stretched for many buyers, but if rates do fall gradually, purchasing power will improve incrementally. Our affordability calculator can help you understand what you might be able to borrow at different rate levels. For broader guidance, see our first-time buyer guide.
• Buy-to-let landlords: Rental yields have improved significantly as property values adjusted and rents climbed, but higher-for-longer rates continue to squeeze margins on leveraged portfolios. Our buy-to-let mortgages guide explores the key considerations in the current environment.
• Those considering debt consolidation: With household finances under pressure, some borrowers are exploring whether consolidating unsecured debt into their mortgage makes sense. Our debt consolidation calculator and debt consolidation guide can help you weigh the pros and cons carefully.

The MPC's Credibility Is on the Line

Perhaps the most important thing to understand about the Bank of England's position in 2026 is that the MPC is acutely conscious of its own credibility. Having been criticised for acting too slowly when inflation surged in 2021 and 2022, the committee is unlikely to repeat that mistake by cutting rates prematurely and being forced to reverse course. The asymmetry of that reputational risk means the bias, in conditions of uncertainty, is likely to be towards doing less rather than more.

That is a sobering message for borrowers hoping for a rapid return to the ultra-low rates of the 2010s. The structural environment — higher public debt, reshored supply chains, an ageing population driving public spending — suggests that the "new normal" for interest rates may be meaningfully higher than the pre-pandemic era, even once the current inflation cycle fully unwinds.

The path of UK interest rates in 2026 will ultimately be shaped by forces that are, in large part, beyond the Bank of England's control — global trade dynamics, geopolitical events, and the decisions of other major central banks. What borrowers can control is how well-prepared they are for different outcomes. Speaking to a whole-of-market mortgage broker remains one of the most effective ways to navigate that uncertainty.