Key Takeaways
- Interest rate expectations have been volatile this year after the Iran war triggered a rise in energy prices.
- Bond investors argue rate hikes are unlikely based on broader economic data and that the BoE will remain cautious.
- After four rate cuts in 2025, futures markets point to possible rate rises in the autumn.
While fixed income investors still expect the Bank of England to hold UK interest rates at 3.75% this year, the likelihood of rate rises has increased in recent days following renewed hostilities between the US and Iran.
Attacks on ships in the Strait of Hormuz during the fragile ceasefire have caused oil prices to spike again after falling back to pre-conflict levels over the last month.
The surge in energy prices since the start of the war at the end of February has caused interest rate expectations to swing wildly this year.
“Oil prices have been the number one driver of interest rate markets this year,” says Aegon Asset Management investment manager James Lynch.
UK Interest Rate Expectations Have Been Volatile
Futures markets are now focusing on September and November as the most likely meetings for the BoE to increase the borrowing rate, although the probability of a hike remains below 50%.
After four rate cuts in 2025, further reductions were anticipated with inflation easing toward the BoE’s 2% target. This narrative was turned on its head by the Iran war, which ignited fears of an inflationary energy supply shock in the UK. At the height of the energy price spike in March, futures markets had priced up to four BoE hikes to combat a potential surge in inflation. The ceasefire and apparent end of hostilities then saw market expectations for UK interest rates fall back again. So far the UK central bank has held interest rates steady in the first four meetings of 2026.
Despite the fears of rising inflation, the UK Consumer Prices Index has not risen sharply, even though it remains above the official 2% target. The latest UK inflation release for May came in below expectations at 2.8%; June data is released on July 22 and the latest FactSet consensus is for a 2.6% rise in CPI.
Michael Field, Morningstar’s chief European market strategist, says it may take a while for inflation to fall to 2%, but the fears of runaway price rises have eased since the start of the conflict in late February.
Looking toward the next set of interest rate decisions, rate-setters will pay attention to July’s inflation figures as the data will begin to reflect the impact of the raised energy price cap, which reset 13% higher on July 1.
The price cap has shielded UK consumers from some of the impact of higher energy prices, as the previous cap running from April to June had been set prior to the conflict.
Katy Stoves, investment manager at Mattioli Woods, says the key battleground for the BoE’s Monetary Policy Committee is whether rate-setters can continue looking through the energy shock.
Recent decisions to hold interest rates at 3.75% saw a voting split emerge among the nine MPC members, with chief economist Huw Pill and Megan Greene both going against consensus, led by Governor Andrew Bailey, to favor a hike to 4% at June’s meeting.
“Wage growth has been easing and is running below forecasts, which aids Bailey’s argument. But, with services inflation still elevated and household inflation expectations already stretched before the war, the Bank knows it is playing with limited margin for error,” Stoves adds.
Ed Hutchings, head of rates at Aviva Investors, also suggests jobs data will prove a vital factor in the BoE’s decision-making.
“A weaker employment market could well give the MPC more pause for thought around potential hikes in the face of elevated inflation. However, for now the MPC as a collective will want to be patient and assess the situation over time before any potential interest rate moves. They do not want to hamper what is already somewhat of a weak economic backdrop,” he says.
When Are the Next UK Inflation Releases?
- July 22, 2026
- Sept. 16, 2026
- Oct. 21, 2026
- Nov. 18, 2026
- Dec. 16, 2026
BoE Urged to Look Through Temporary Supply Shocks
Given the temporary nature of supply shocks, Nedgroup’s head of fixed income David Roberts says too much focus is being placed on the energy price spike.
“Central banks should be looking through such price spikes, especially when the source is obvious—as it was with the supply shock that was covid—and unless they think there is clear evidence of longer-term inflation transmission, do nothing,” he says.
Roberts adds the core focus for monetary policy should always be on employment, inflation, earnings and growth.
“It’s worth reflecting that almost all the major measurements suggest the UK economy to be in way better—not great, just way better—shape than most headlines suggest, and most commentators expected. Look no further than sterling, which despite times of political turmoil, seems to have held up remarkably well,” he says.
Could the Bank of England Resume Rate Cuts in 2027?
Based on current economic data, Aegon’s Lynch says the Bank of England is unlikely to hike, despite what markets are pricing in.
“The BoE will continue the policy of wait and see, the committee is divided and coalescing around anything other than doing nothing will be hard yards,” he says.
Lynch also suggests that once the comparison with periods of lower energy prices fades from the CPI data, interest rate cuts could become likely next year.
“If inflation falls below target, as expected, central banks should have the cover needed to begin lowering rates further,” he adds.
When Are the Next UK Interest Rate Decisions?
- July 30, 2026
- Sept. 17, 2026
- Nov. 5, 2026
- Dec. 17, 2026
