Where next for interest rates?

The Bank of England held interest rates at 3.75% at the June meeting of the Monetary Policy Committee (MPC) after weaker than expected inflation in May ease the pressure for a rise.

MPC members voted 7-2 to keep rates on hold with two members voting for a quarter-point rise. The decision came a day after data showed headline Consumer Price Index (CPI) inflation sticking at 2.8% a year in May, the same reading as April. A rise in inflation had been expected.

Expectations for inflation and rates have been sent higher this year by the conflict in the Middle East, which has threatened to spike energy costs and send prices higher. After the outbreak of fighting markets were pricing in as many as three quarter-point rate rises over the next year. Those expectations have eased as the outline of a ceasefire deal has emerged and headed lower again following the better news on inflation.

The markets now expect just one rise in the coming months, possibly in September but more likely in November. One further cut is possible over the next 12 months but not certain. 

The Bank will be reluctant to raise rates in the face of already slowing growth and will know that higher energy prices can have a deflationary effect on the economy without the need for rate rises on top. But rate-setters will be wary of inflation picking up again.  

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Beyond the Middle East conflict, UK economic data has been generally supportive of interest rates falling. Unemployment dipped to 4.9% in the three months to April, while wage growth slowed in the same period to 3.4% for regular earnings (excluding bonuses) and 4.4% for total earnings (including bonuses). This extra ‘slack’ in the labour market makes it arguably less likely that high energy prices will translate into higher ingrained inflation.

• Read: What do rate cuts mean for markets?

The next central bank meeting is scheduled for 30 July 2026 followed by meetings on:

• 17 September 2026
• 5 November 2026
• 17 December 2026

How rates have changed

The path ahead for interest rates, as implied by market prices, has changed significantly following the outbreak of the conflict in the Middle East. 

The chart below shows the implied level of interest rates from 16 February, 28 April and 17 June 2026. This is based on market prices for government bonds with different lengths of maturity.

You can see how the path for rates on 16 February - prior to the outbreak of fighting - was downwards. At the height of uncertainty on 28 April, before any negotiations for a ceasefire, expectations had jumped and rates were forecast to approach 4.5% - three quarter-points higher than their current levels. 

The reading for 17 June, following the signing of a ceasefire deal, shows that expectations have moderated significantly. Just one rise to 4% now expected in the coming months, with another possible but currently not probable.

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