Where next for interest rates?

Expectations for interest rates have risen again following renewed fighting in the Middle East, with concerns about higher energy prices in the future outweighing a larger-than-expected fall in inflation in June.

UK Consumer Price Index (CPI) inflation dipped to 2.6% in the year to June, down from 2.8% in May and larger than the fall to 2.7% that had been expected by economists. Lower inflation eases the pressure on the Bank of England to raise rates.

However, the Bank must weigh the better news on inflation against the recommencement of fighting in the Middle East and another closure of shipping lanes in the Strait of Hormuz. Oil prices have jumped since fighting renewed last week, and in turn this has resulted in markets expecting higher inflation - and rates - in the future.

Prices in the bond market now expect no change to rates when the Bank’s Monetary Policy Committee meets at the end of July, while one quarter-point rise is possible in September. More likely, according to markets, is that we see that rise at the November MPC meeting. A further rise is then possible in December but more likely in February 2027, with one more rise likely later in 2027.

The Bank of England held interest rates at 3.75% at the June meeting of the MPC. If all the predicted rate rises come to pass the Bank rate could sit at 4.5% a year from now.

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Beyond the Middle East conflict, UK economic data has been generally supportive of interest rates falling. In addition to inflation falling, unemployment stuck at 4.9% in the three months to May, slightly ahead of the same period a before, while wage growth slowed in the same period to 3.4% for regular earnings (excluding bonuses) and 4.3% 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, 17 June and 22 July 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. Expectations rose significantly after fighting broke out but eased once a ceasefire had been announced. The reading for 17 June, following the signing of the ceasefire deal, shows how expectations moderated significantly. 

However, the rates reading for 22 July shows that expectations have risen again since the ceasefire failed. Markets now predict the rates to hit 4.45% in a year’s time. That’s an indicative level, in reality the Bank rate is likely to move in quarter-point increments, suggesting a likely level of 4.5% next year. 

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