Key Takeaways
- Futures markets currently expect the Bank of England to hold rates this week, before hiking them three times through December.
- Some economists say the BoE is likely to hold rates because of weaker inflation and jobs data.
- The new government’s tax and spending priorities, as well as policies already announced, are being closely watched for their impact on inflation.
Ongoing uncertainty over the inflationary impact of the Iran war surrounds the Bank of England’s latest interest rate decision this week. While futures markets expect the BoE to hold rates at 3.75% again after four consecutive no-change meetings, it is now expected to increase rates three times between September and December.
The outlook is a marked contrast from the start of the year, when futures markets were expecting at least two rate cuts in 2026 because of weakening inflation. That was prior to US strikes on Iran in late February, which sent oil prices soaring amid a closure of the Strait of Hormuz, stoking fears of a recession.
Since then, the effects of the Iran war on UK inflation have been muted, but CPI remains above the Bank of England’s 2% target, and is not expected to fall back from its current level of 2.6% until next year at the earliest. The government’s energy supply cap, which was raised earlier this month, is now expected to feed into higher inflation figures in July’s data, which is due next month. Oil prices have also been pushed back toward USD 100 after hostilities reignited between the US and Iran in mid-July.
“The expectation of three rate rises just goes to show the degree to which the market feels inflation is still working its way through the food chain, and what is required to get it back to normal levels,” says Michael Field, chief European market strategist at Morningstar.
Some experts argue that the market pricing is at odds with what the Bank of England is likely to do in practice. Peter Goves, head of developed market debt sovereign research of MFS Investment Management, says that UK interest rates are already restrictive compared with the eurozone and that the current UK economic data doesn’t support rate increases. “Caution can and should prevail,” he says.
Why Would the Bank of England Hold Rates Next Week?
At his Mansion House speech in mid-July, Bank of England Governor Andrew Bailey said he had been wrong-footed by the Iran war.
“Back in early February I was foolish enough to remark to a colleague that, on the economic front, things were looking more settled,” he said. “I was expecting inflation to return to its 2.0% target in around April or May, and then we would need to assess what level of interest rate would keep it there. Well, that jinxed it.”
Since then, the BoE has held rates, after having cut them four times in 2025. The UK’s latest inflation data, covering the 12 months to June 2026, showed falling inflation in line with expectations as lower fuel and food costs helped slow price rises. Experts say this was enough to validate this cautious approach.
“June’s unexpectedly large fall in the UK’s headline CPI rate to 2.6% is widely expected to provide MPC members with enough cover to continue their wait-and-see approach,” says Danni Hewson, head of financial analysis at AJ Bell.
This could change, however. At the BoE’s June meeting, the monetary policy committee voted by a majority of seven-to-two to hold rates. The two rate-setters on the MPC who voted to hike rates—chief economist Huw Pill and external committee member and economist Megan Greene—have been vocal in their support for increasing interest rates.
What Will Andy Burnham Do About Inflation?
With new prime minister Andy Burnham already having pledged support for cost-of-living pressures in the form of VAT relief on electricity bills, economists will be watching the government’s announcements keenly for any evidence of the further inflationary impact of a higher-spending government. Bond markets are already sensitive to this, as they have been throughout Keir Starmer and Rachel Reeves’ tenures as prime minister and chancellor.
After Reeves increased National Insurance employer contributions at her first budget announcement in late October 2024, Bank Governor Andrew Bailey was on the record saying that the inflationary effects of the policy were the “biggest issue” facing the UK economy, as businesses and bosses were largely expected to pass on their higher bills to consumers in the form of higher prices.
When Are the Next UK Interest Rate Decisions?
- July 30, 2026
- Sept. 17, 2026
- Nov. 5, 2026
- Dec. 17, 2026
“The fiscal position continues to be a focal point for the bond market, and with another prime minister, questions over policy will continue to impact gilt-market volatility,” says Rushabh Amin, multi-asset portfolio manager at Allspring Global Investments.
“Fiscal measures announced so far would have little impact on inflation trends, behaving like a one-off measure,” he says. “The inflation side of the picture has improved since last year but has remained above target for years. Services inflation has remained relatively sticky, but wage growth has begun to fall. The labor market remains under pressure.”
