Picture a homeowner renewing their mortgage in early 2026. They’d been planning around gradual rate cuts throughout the year, expecting their monthly payments to drop. Then war broke out in the Middle East. Oil prices jumped 30%. Suddenly, those expected rate cuts looked uncertain. That’s the situation UK borrowers face right now.

Interest rates affect nearly every financial decision you make: mortgages, savings accounts, business loans and credit cards. When the Bank of England adjusts the base rate, the ripple effects touch millions of households and businesses. Here’s what the data shows about where interest rates are heading this year, and what it means for your money.

Where Interest Rates Stand Now

The Bank of England held interest rates at 3.75% at its February 2026 meeting. This represents a significant drop from the 5.25% peak reached in August 2023, when the Bank was fighting inflation that had climbed to 11.1%.

The vote wasn’t unanimous. Five members voted to hold rates steady, whilst four voted for a 0.25 percentage point cut. That split vote tells you something important: policymakers are divided on the right path forward.

What Economists Were Predicting Before the Middle East Conflict

Before war broke out in the Middle East on 28 February 2026, most forecasters expected a clear path for interest rates. Two-thirds of economists polled by Reuters anticipated a cut to 3.50% by the end of March 2026, with some expecting rates to fall to 3% by year-end. 

Capital Economics predicted rates would drop to 3% in 2026, below the 3.5% markets had priced in. Bank of America expected quarterly cuts in March or June, possibly April or July, bringing rates to 3.25%. ING forecasted two cuts in the first half of 2026, also reaching 3.25%. 

The reasoning was sound. Inflation had been falling – it dropped to 3% in January 2026 from 3.4% in December, a sharper decline than expected. The Bank of England projected inflation would hit the 2% target by spring 2026. Unemployment had risen to 5.2%, the highest since January 2021. UK economic growth was anaemic at just 0.1% in the three months to December. All of this created a case for rate cuts to support the economy. 

How the Middle East Conflict Changed Everything

The outbreak of conflict involving Iran, Israel and the United States on 28 February 2026 upended those predictions. Oil prices surged nearly 30% within days, briefly trading just below $120 per barrel. The Strait of Hormuz, which carries one-fifth of the world’s oil exports, faced disruption to commercial shipping.

That matters because higher energy costs feed through to everything else – transport, food production and manufacturing. Oxford Economics estimates the disruption will add about 0.4 percentage points to UK inflation in 2026, pushing consumer price growth to around 2.7% for the year instead of the previously forecast 2.3%. 

The impact on households will come through energy bills and petrol prices. Wholesale gas prices in Britain surged in response to the conflict. Oxford Economics calculates that the typical household energy bill could rise by about 13.5% in July 2026 if wholesale gas prices persist, adding around 0.5 percentage points to inflation that month. Petrol prices jumped by just under 2.5p per litre in the first week of March, with diesel rising more than 3p per litre. 

Current Interest Rate Forecasts: Three Scenarios

Markets reacted quickly. Before the conflict, there was near certainty of an interest rate cut at the March 19 meeting. That probability dropped to less than 20% within a week.

The National Institute of Economic and Social Research modelled what would happen if oil and gas prices increase by 30% and 50%, respectively, over one year. UK inflation in 2026 would increase by approximately 0.7 percentage points relative to baseline forecasts. Interest rates would rise by approximately 0.8 percentage points compared to baseline, potentially climbing to 4.5%. Source: NIESR

Deutsche Bank analysts predicted UK inflation could reach nearly 4% by the end of 2026 – double the Bank of England’s 2% target – if there’s no swift conclusion to the war and energy prices remain high. 

Three broad scenarios exist for interest rates in 2026:

Scenario 1: Gradual cuts continue. If the Middle East conflict resolves quickly and energy prices fall back, the Bank of England could resume cutting rates in April or June. 

Scenario 2: Extended pause. If inflation proves stubborn due to sustained energy price increases, the Bank may hold rates at 3.75% throughout much of 2026. Allan Monks, chief UK economist at JPMorgan, noted that whilst cuts are possible in the first half of 2026, March is off the table and April requires “a clear calming of geopolitical tensions”. 

Scenario 3: Rate increases. If the surge in energy prices persists or expands, the Bank could raise rates back above 4%. Markets have already begun pricing in this possibility. The Office for Budget Responsibility warned the UK economy could face a “very significant” hit from the war and accompanying inflation. 

What the Bank of England Is Watching

The Bank makes its decision every six weeks based on several indicators. Inflation is the primary concern. The Bank projects inflation will fall to 2% by June 2026 and stay around 2% thereafter, but this forecast was made before the Middle East conflict. 

The labour market provides another signal. Unemployment stands at 5.2%, with the number of employed people rising by only 52,000 in the three months to January. Private sector wage growth fell to its weakest pace since November 2020 in the three months to October. A softer labour market with higher unemployment typically supports the case for rate cuts. 

Economic growth remains weak. The UK economy grew just 1.3% in 2025, below both the Bank of England’s projection of 1.4% and the Office for Budget Responsibility’s prediction of 1.5%. 

Tom Bill, head of UK residential research at Knight Frank, captured the uncertainty: “A prolonged conflict in the Middle East would dampen sentiment and delay rate cuts due to rising inflation, which would put downwards pressure on prices. That said, we have seen how quickly interest rate expectations can change this year, and the underlying weakness in the jobs market is one of several reasons that multiple cuts could come back onto the table in 2026. A lot hinges on the length of the conflict.” 

What This Means for Your Mortgage

Mortgage rates respond differently depending on the type you have. If you’re on a variable-rate or tracker mortgage, your rate typically moves in line with Bank of England decisions. The potential for rates to hold steady or even rise means your monthly payments might not fall as quickly as you’d hoped. In some cases, they could increase.

Fixed-rate mortgages are priced off interest rate futures, not the base rate directly. When markets anticipate higher interest rates ahead, lenders increase fixed-rate prices. Several major lenders — including HSBC, Nationwide, and Coventry Building Society — already announced selected fixed-rate increases in early March 2026 as surging energy prices sparked inflation concerns. 

Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, advised that first-time buyers and homeowners needing to refinance “would be wise to lock in the best deal they can find now”. She noted that if the Middle East conflict proves short-lived and mortgage rates ease again, brokers can often switch borrowers to a better rate on their product right up until two weeks before their mortgage term starts. 

The Bank of England’s Next Decision

The Monetary Policy Committee meets on 19 March 2026 to announce its next decision on interest rates. The meeting will be overshadowed by heightened uncertainty around energy prices and their impact on inflation and growth.

Anna Titareva, European economist at UBS Investment Bank, predicted policymakers would prefer “to wait for more clarity and stay on hold” in March. She explained that the MPC won’t be able to determine the nature of the shock with sufficient certainty by the meeting date. Whilst the Bank could look through short-lived shocks, larger and more persistent shocks require a monetary policy response. Source: CNBC

Governor Andrew Bailey told MPs on 24 February that the prospect of an interest rate cut within weeks was “a genuinely open question”. That was before the Middle East conflict escalated. Source: HomeOwners Alliance

Subsequent meetings are scheduled for: 30 April, 18 June, 30 July, 17 September, 5 November, and 17 December 2026. Source: Morningstar

Comparing the Current Situation to 2022

Some analysts have drawn comparisons to Russia’s invasion of Ukraine in February 2022, which sent UK inflation to a 41-year high of 11.1% by October 2022. But there are important differences.

Liam O’Donnell, fixed income manager at Artemis, argues the impact is unlikely to be as dramatic. “The MPC and central banks generally were behind the curve back then,” he says. “We were coming off the back of an extended period of a post-COVID global supply shock. Inflation was 5.5% and rising, and central bankers were just dismissing this as a transitory shock. Today, the central banks have more credibility, and we’re in a much better starting position.” 

UK inflation has been falling for two years, from that 11.1% peak to 3% in January 2026. The starting point matters.

What to Do Now

Interest rate predictions are notoriously difficult. The complexity of the current situation in the Middle East makes forecasting even harder. The Bank of England’s own statement captures this: “We can’t say precisely when or by how much [rates will change]. That depends on how things evolve. So, we will continue to monitor developments in the UK and internationally.” Source: Bank of England

If you’re buying or remortgaging soon, consider your options carefully. Danni Hewson, head of financial analysis at AJ Bell, noted: “There are still massive question marks about what 2026 will bring, and markets don’t expect the Bank of England to cut interest rates more than once or twice over the next year, so borrowers hoping to see a return to the ultra-low levels many people had become used to will have to adapt.”

For those with variable-rate mortgages, the uncertainty cuts both ways. Rates might hold steady, might edge down slowly, or might increase depending on how the geopolitical situation develops and what that does to inflation.

The one certainty is that interest rates will remain significantly higher than the near-zero levels of 2020-2021. The era of ultra-cheap borrowing is over, regardless of what happens next.

Frequently Asked Questions

Will interest rates definitely fall in 2026?

Not definite. Before the Middle East conflict, most economists expected two to three cuts, bringing rates to 3% or 3.25%. Now there’s significant uncertainty. If energy prices stay elevated due to prolonged conflict, rates could hold at 3.75% or even increase. If the conflict resolves quickly, gradual cuts remain possible starting in April or later.

How does the Middle East conflict affect UK interest rates?

Higher oil and gas prices push up energy costs, which feed through to transport, food production and manufacturing. This increases inflation. When inflation rises above the Bank of England’s 2% target, the Bank faces pressure to hold or raise interest rates to control price growth. The National Institute of Economic and Social Research estimates that sustained energy price increases could push rates to 4.5%.

What’s the difference between the base rate and my mortgage rate?

The Bank of England sets the base rate at 3.75%. This influences but doesn’t directly determine your mortgage rate. Variable and tracker mortgages typically move in line with base rate changes. Fixed-rate mortgages are priced based on interest rate futures — what markets expect rates to do in future. That’s why fixed rates can rise even before the base rate increases, or fall before cuts happen.

Should I fix my mortgage now or wait?

There’s no single answer. If you fix now, you’re protected if rates hold steady or rise, but you miss out if they fall. If you wait and rates increase, you’ll pay more. Several lenders already raised fixed rates in March 2026. Some brokers can switch you to a better rate if one becomes available before your mortgage term starts, which gives you some protection if you fix early and rates later drop.

When is the Bank of England’s next interest rate decision?

19 March 2026. The probability of a cut at that meeting has dropped from near certainty before the Middle East conflict to less than 20% as of early March. The following decisions are scheduled for 30 April, 18 June, 30 July, 17 September, 5 November, and 17 December 2026.

Could interest rates actually increase in 2026?

Possible, though not the most likely scenario. Markets are pricing in about a 70% chance of an increase by year-end if energy prices remain elevated. Deutsche Bank predicts inflation could reach 4% by late 2026 if the Middle East conflict continues, which would create pressure for rate rises. The National Institute of Economic and Social Research modelled scenarios where rates climb to 4.5%.

What happens to my savings if rates stay at 3.75%?

Savings rates typically track the Bank of England base rate, though with a delay, and usually pay less than the base rate. If the base rate holds at 3.75%, savings rates should remain relatively stable. If the base rate falls, savings returns will gradually decline. If it rises, you’d eventually see better returns on cash savings accounts.

How long will the current uncertainty last?

Impossible to predict. It depends on how the Middle East conflict develops and its impact on energy prices. Some economists expect clarity by April, allowing the Bank to resume cutting rates. Others warn of an extended pause if the situation remains volatile. The Bank of England reviews economic data every six weeks at MPC meetings and adjusts policy based on what the data shows.

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