Further cuts to the Bank of England base rate may not materialise as a result of the conflict in the Middle East.
Traders no longer expect any interest rate cuts this year, with a growing possibility that the central bank will need to raise them later this year.
Markets are also pricing in a roughly 70 per cent chance of the Bank of England raising rates this year, in December, from the current level of 3.75 per cent.
There is a 50 per cent chance the Bank could hike the base rate in November.
Cutting interest rates could risk adding fuel to what may prove to be a fresh inflationary spike as a result of the conflict in the Middle East.
This, despite CPI inflation falling in January, according to the latest figures from the Office for National Statistics (ONS).
It revealed inflation rose by 3 per cent in the 12 months to January, down from 3.4 per cent in the year to December 2025.
Prior to the conflict in the Middle East, the Office for Budget Responsibility (OBR) was forecasting that inflation will return to the Bank of England’s 2 per cent target over the coming months.
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What next for interest rates?
In December, the bank cut interest rates from 4 per cent to 3.75 per cent, down from a high of 5.25 per cent the previous year.
The Bank of England opted to hold interest rates at 3.75 per cent in February.
Four members of the Monetary Policy Committee opted for a cut to 3.5 per cent, but five members – including Bank of England Governor Andrew Bailey – voted to hold firm at 3.75 per cent.
The next decision will take place on 19 March, with the majority of analysts now expecting policy makers will hold rather than cut.
The Bank of England uses interest rate rises as a lever to curb borrowing and spending when inflation gets too high, so when inflation is falling, this gives it headroom to reduce rates.
The CPI rate of inflation is expected to fall to 2 per cent in late 2026 according to the Office for Budget Responsibility (OBR).
However, this will look increasingly unlikely to become reality the longer the conflict in the Middle East drags on.
If inflation starts to rise, largely as result of trade disruption and rising energy prices, then the central Bank may feel it has little choice other than to increase rates.
The central bank will also be keeping a close eye on economic growth and unemployment this year.
When growth is sluggish and unemployment high it despresses future inflation expectations. If the Bank believes this will ultimately push inflation below target, it can use interest rate cuts to encourage investment and hiring, as it makes borrowing cheaper.
The OBR downgraded its GDP growth forecast for this year and now expects it to slow from 1.4 per cent in 2025 to 1.1 per cent in 2026.
Unemployment is perhaps more concerning. ONS figures show unemployment at its highest level in five years.
The OBR expects the unemployment rate to peak at 5.3 per cent this year as people struggle to find work ‘amid subdued hiring demand’.
This is a third of a percentage point higher than the watchdog’s November forecast, and recent figures from the Office for National Statistics (ONS) show the jobless rate has already reached 5.2 per cent.
The base rate and the Bank of England
The Bank of England moves what is officially known as bank rate but more commonly called base rate to try to control inflation.
Base rate is the single most important interest rate in the UK. It determines the interest rate the Bank of England pays to commercial banks that hold money with it and therefore influences the rates those banks charge people to borrow money or pay on their savings.
The theory is that raising interest rates lifts the cost of borrowing for individuals and businesses and thus reduces demand for it, slowing the flow of new money into the economy and applying the brakes.
In contrast, cutting interest rates lowers the cost of mortgage rates and other borrowing and increases demand, pushing the accelerator on the economy.
Higher savings rates also make saving more attractive, while lower rates encourage spending over setting money aside.
The MPC sets interest rates to try to keep consumer prices inflation (CPI) at the Bank and Government’s 2 per cent target.
> Interest rate rise and fall calculator: How moves affect your payments
Rates headed down: The Bank of England is expected to cut interest rates one or two more times this year
What’s happened to inflation and interest rates?
Higher than expected inflation could result in MPC members refraining from rate cuts in the future.
A major inflation spike over recent years saw CPI rocket into double-digit territory, driven by the aftermath of the disruptive Covid lockdowns combined with an energy price crisis triggered by Russia’s invasion of Ukraine.
This saw the Bank of England raise base rate rapidly from its record low of 0.1 per cent, reached during the Covid pandemic years.
The first move up to 0.25 per cent came in December 2021 and a sharp series of rises from the MPC followed, driving base rate all the way up to 5.25 per cent in August 2023.
Rates were then held at 5.25 per cent until August 2024 until they were gradually cut to 3.75 per cent where they remain today.
Inflation was 3 per cent in the 12 months to January. While it still sits higher than the Bank of England’s 2 per cent target, the Office for Budget Responsibility (OBR) expects inflation will fall progressively to the Bank of England’s 2 per cent target this year.
This of course now hangs in the balance thanks to the conflict in the Middle East.
Cause and effect: Inflation and wage growth are both factors that could determine what the Bank of England will do with base rate in the future
What a base rate cut would mean for savings and mortgage rates
Many people assume that savings rates and mortgage rates are directly linked to the Bank of England base rate.
In reality, future market expectations for interest rates and banks’ funding and lending targets and appetite for business are what really matters.
Market interest rate expectations are reflected in swap rates. A swap is an agreement in which two banks agree to exchange a stream of future fixed interest payments for another stream of variable ones, based on a set price.
These swap rates are influenced by long-term market projections for the Bank of England base rate, as well as the wider economy, internal bank targets and competitor pricing.
In aggregate, swap rates create a benchmark of where the market thinks interest rates will go – though they can shift quickly in light of economic changes.
Mortgage rates are expected to rise over the coming weeks and days as a result of a spike in swap rates following the start of the conflict with Iran.
Two-year swaps reached 3.99 per cent on 9 March, up from 3.36 per cent on 27 February.
Meanwhile, five-year swaps hit 4.09 per cent, up from 3.41 per cent on 27 February.
Any borrowers hoping for a return to the rock bottom interest rates of 2021 will likely be disappointed. However, savers will be reassured that rates are not expected to plummet to the depths of 2021 anytime soon.
Richard Carter of Quilter Cheviot says: ‘Swap rates are a useful indicator of current expectations, but it is important to remember they are no better at predicting the future than any other economic indicator. The economic outlook can change very quickly and very dramatically.’
> Saving and banking: Read the latest on savings rates and top deals
Sticky: Higher than expected inflation could result in MPC members including Andrew Bailey (pictured) refraining from rate cuts in the future
What should savers do?
Experts foresee savings rates falling – though if the base rate doesn’t fall again in 2026, they may stay higher for slightly longer.
Savers can still get over 4 per cent in an easy-access savings account and the best fixed rate savings pay more than 4.25 per cent.
The good news is that with inflation at 3 per cent, it means savers who hold their cash in the top paying accounts could still be making a real return, before tax – but it’s very marginal.
Our savings tables show the best easy-access savings, top cash Isas and fixed rate savings deals.
The advice to savers has been to keep on top of the changing market if they want to secure a competitive deal.
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What next for mortgage rates?
The best mortgage rates remain bewlo 4 per cent, but many of the best deals are being withdrawn or increased at present.
Banks and building societies are rushing to reprice mortgage deals higher amid the market fallout from the conflict in the Middle East.
Lenders including Halifax, Barclays, HSBC and Nationwide Building Society have all announced rate increases in recent days.
More lenders are expected to follow suit over the coming weeks and days thanks to a shift in future interest rate expectations.
For now, the vast majority of households should be able to secure a fixed mortgage rate somewhere between 3.75 and 4.5 per cent depending on the level of equity or the size of their deposit.