At the start of the year, the Bank had been expected to cut interest rates twice in 2026, with the first drop predicted to come in March or April.
However, the increase in fuel prices and inflation after the outbreak of the conflict has upended all of this. Oil prices initially rose sharply as a result of disruption to supplies in the region, but dropped back when various ceasefires were agreed.
Oil prices rose again when the US and Iran resumed attacks in the Strait of Hormuz in July.
“Inflation has fallen faster than we’d expected, but the conflict in the Middle East continues to mean high and volatile energy prices,” said the Bank’s governor, Andrew Bailey.
“That will cause inflation to rise again later this year. However the conflict unfolds, our job is to make sure any increase in inflation is temporary and that it comes back to our 2% target.”
UK household energy bills rose after the latest increase in the price cap which took effect on 1 July, which could push UK inflation higher.
Given the uncertainty, many analysts think rates are likely to stay at 3.75% for the foreseeable future.
Mortgages
Just under a third of households have a mortgage, according to the government’s English Housing Survey, external.
About 500,000 homeowners have a mortgage that “tracks” the Bank of England’s rate. That means any cut means a reduction in the monthly repayments on their outstanding loan.
An additional 500,000 homeowners on standard variable (SVR) rates rely on their lender choosing to pass on any Bank rate cut.
But the vast majority of mortgage customers – some 87% – have fixed-rate deals. While their monthly payments aren’t immediately affected by a rate change, their future deals are.
As at 30 July, the average rate on a new two-year fixed deal was 5.62%, up from 4.83% at the start of March, according to the financial information service Moneyfacts.
For those looking for a five-year deal, the average rate was 5.66%, up from 4.95% over the same period.
The average two-year tracker rate was 4.51%.
About 800,000 fixed-rate mortgages with an interest rate of 3% or below are expected to expire every year, on average, until the end of 2027. Borrowing costs for customers coming off those deals are likely to rise sharply.
Mortgage calculator
You can see how your mortgage may be affected by future interest rate changes by using our calculator:
In recent years, the UK has had one of the highest interest rates in the G7 – the group representing the world’s seven largest so-called “advanced” economies.
In June 2024, the European Central Bank (ECB) started cutting the main interest rate for the eurozone from an all-time high of 4%, falling to 2% in June 2025.
However, in June 2026, the ECB raised rates to 2.25% as it reacted to the Iran war.
The US central bank – the Federal Reserve – has cut interest rates three times since September 2025, taking them to the current range of 3.5% to 3.75%, the lowest since 2022.
The Fed most recently voted to hold rates at that level at its July meeting, the second under new chair Kevin Warsh.
US President Donald Trump had repeatedly attacked the previous Fed chair Jerome Powell for not cutting rates.
Warsh is expected to be generally more supportive of cuts, but will also have to respond to the fallout from the Iranian conflict.
