Will UK interest rates fall in 2026? Latest Bank of England predictions
The Bank of England cut interest rates to 3.75% in December, bringing the base rate to its lowest level since February 2023. But will we see more cuts in 2026?
Interest rates are at their lowest level 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 the 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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Official figures from the Office for National Statistics (ONS) show that inflation fell to 3.2% in November, the latest month for which the MPC had data. It was the second consecutive fall in inflation after it remained stubbornly high throughout 2025.
What is more, most analysts, including economists within the BoE, believe inflation will fall closer to the 2% target in 2026, aided by measures announced in the Autumn Budget.
But what does falling inflation mean for the future of monetary policy? We look at where interest rates could go in 2026.
The economic backdrop
The MPC uses economic data to help inform its decision over whether or not to raise, lower, or hold interest rates.
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 at the 2% target. 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 they will lower them.
As mentioned above, inflation is currently above the 2% target, coming in at 3.2% in November. However most economic forecasts expect inflation to fall closer to target throughout 2026, 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 Office for National Statistics (ONS) reported that unemployment hit 5.1% in the three months to October, the highest it has been since January 2021. At the same time, regular wage growth slowed to 4.6% in the same period.
The overall UK economy is also weakening, with the ONS reporting that GDP fell by 0.1% in the three months to October.
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.
Economists are now wondering whether this quarterly cadence of rate cuts will continue into 2026.
Economists at Deutsche Bank believe we will get half the rate cuts we got in 2026, expecting two cuts of 25 basis points each to bring the bank rate down to 3.25%. They expect these to happen in March and June.
Oxford Economics’s senior economic advisor and former MPC member, Michael Saunders, added: “We continue to expect that, with sluggish growth, rising unemployment and lower inflation, Bank Rate will fall to 3.25% at the end of next year, with the next cut at end-April and another cut in H2.”
This being said, some believe more rate cuts than this are not entirely out of the question.
Sanjay Raja, chief UK economist at Deutsche Bank, said: “We expect the precipitous drop in CPI next year alongside a deteriorating labour market to keep quarterly rate cuts in play next year.”
The markets are currently pricing in one rate cut of 25 basis points in the first half of the year, but the picture beyond that is less certain.
Another thing to watch as the MPC continues to meet in 2026 is how the vote is split at the committee meetings.
Recent MPC meetings have ended with knife-edge decisions, with the committee voting for a measure by 5-4, giving Andrew Bailey the deciding vote. This was the case in the last two meetings, where a motion to cut was passed by 5-4 in December, while a motion to hold was passed 5-4 in October.
The division in the vote splits indicates that there is disagreement within the MPC over whether the central bank should cut rates, and how much they should do this by.
The crux of the issue largely comes down to different members’ interpretations of the inflationary outlook. While some members like Sarah Breeden, Swati Dhingra, and Bailey, among others, believe that disinflation has become more established, others are more sceptical.
For example, Huw Pill, the central bank’s chief economist, justified his vote to hold rates in December by arguing that underlying inflationary pressures “are stronger than expected a year ago,” as some economic indicators “[raise] concerns about a slowing or stalling in disinflation towards target.”
Ultimately, future rate cuts will depend on the economic data available to MPC members. If inflation continues to fall, then the case for further rate cuts is stronger. The opposite is also true.
Are we reaching the neutral rate of interest?
Following December’s rate cut decision, 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.
Raja 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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