Where next for interest rates?

The Bank of England increased interest rates to 4% in November, marking its first hike in over three years.

The central bank’s Monetary Policy Committee (MPC) voted 8-1 to raise the UK base rate from 3.75% to 4%. One member backed a bigger hike of 0.5 percentage points. The decision was prompted by high energy prices linked to conflict in the Middle East.
 

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Explaining its decision, the Monetary Policy Committee said: “While the direct effects of higher energy prices are clear, and will continue to feed into firm and household energy bills, there remains limited evidence of knock-on effects on other prices and wages. 

“However, the degree of inflationary pressure in the pipeline is now sufficient to warrant an increase in Bank Rate.”

• Read: 5 steps to safeguard your cash

Higher interest rates may encourage people to spend less money, which makes it harder for businesses to increase their prices.

A hike was widely expected by the market. This is due to renewed fighting in the Middle East, which has driven up oil and gas prices. UK inflation climbed to 3.5% in September, from 3.1% in August, and the Bank of England thinks it will reach 5% by the middle of next year. This is more than double its target of 2%. 

The next UK interest rate decision is scheduled for 17 December 2026 followed by MPC meetings on:

• 4 February 2027
• 18 March 2027
• 29 April 2027

How rate expectations 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. 

Back in February, investors thought the base rate would settle at below 3.5% this year. Now, the market is braced for further hikes - perhaps as soon as December.

Where next for mortgage rates?

As a general rule, if the Bank of England moves interest rates, mortgage rates follow. Ultimately, however, it is up to lenders to decide the rates they offer and changes to mortgage deals can often run ahead or behind changes in the Bank rate. 

Anyone looking for a mortgage recently will have found that variable rate mortgages - where the rate moves directly in line with the Bank Rate - have become significantly cheaper than fixed rate deals. This reflects the expectation that rates will rise.

The best rate on a five-year fixed rate mortgage is currently 4.8%.¹ In March 2026 the best deal was just 3.75%. Average two- and five-year fixed mortgage rates are around 6%.

Where next for savings rates?

Savings rates have climbed in line with the rise in interest rate expectations, although rates are ultimately set by account providers based largely on competition in the savings market.

The best rate currently available for Cash ISA accounts is 4.77%, but this includes a time-limited boost which falls away after a year.²

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Cash options - the best ways to save

There are a number of potential homes for money if you decide to hold it in cash.

It makes sense to shield your cash returns from tax if you can, which means using part of your £20,000 annual ISA allowance to hold cash. Cash ISAs do the job - although any allowance you use for cash cannot then be used for investments.

There are ways to hold cash-like assets in investment ISAs too. Money market funds work a bit like variable-rate savings accounts. They are very low risk and aim to track UK interest rates, although they do not benefit from the same protections as bank deposits. 

Non-ISA cash accounts also exist but returns will be taxed, subject to certain allowances. The rate of tax savers face is going up in April 2027. 

For this reason, some savers choose Premium Bonds. The prize fund rate currently stands at 4.35%, but this is not guaranteed - and you actually need above average luck to achieve this rate of return.  

• Read: Investing in cash in a Stocks and Shares ISA

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. An investment in a money market fund is different from an investment in deposits, as the principal invested in a money market fund is capable of fluctuation. Fidelity's money market funds do not rely on external support for guaranteeing the liquidity of the money market funds or stabilising the NAV per unit or share. An investment in a money market fund is not guaranteed. The value of shares may be adversely affected by insolvency or other financial difficulties affecting any institution in which the Fund's cash has been deposited. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.