Bank of England UK interest rates set for huge change says expert

The Bank of England will make significant adjustments according to a new forecast

A new forecast has made a shock prediction about UK interest rates for 2026. The Bank of England is poised to cut interest rates to their lowest point in over three years as an employment crisis compels policymakers into dramatic intervention, a prominent Swiss bank has cautioned.

The base rate could plummet from its current 3.75% to merely 2.75% following the summer months as joblessness climbs and salary increases decline rapidly, Lombard Odier predicts. Such a reduction would represent the Bank Rate’s lowest point since November 2022.

It would provide significant respite to homeowners and financially strained companies grappling with elevated lending costs. The substantial change would stem from what financial experts characterise as an alarming decline in employment conditions.

Bill Papadakis, from Lombard Odier, suggested the Bank would have minimal alternatives as warning signals intensify. He cautioned that policymakers were confronting a “collapse in job vacancies to below pre-pandemic levels and a rising unemployment rate”.

“Strong wage growth has already slowed meaningfully as the employment picture has weakened,” he said. “Together with falling services inflation, this should translate into lower price pressures, allowing the Bank of England to cut rates to 2.75% by the end of the third quarter – a level close to neutral.”

Government statistics highlight the mounting anxiety. Joblessness has risen beyond 5% during the three months leading to October, the Office for National Statistics reveals. Simultaneously, private-sector earnings growth tumbled to 3.9% across the identical timeframe – marking its most sluggish performance since early 2021. Vacancies crept up marginally to 729,000 in the three months to November, from 723,000 previously.

However, this figure remains dramatically lower than the 1.3 million peak witnessed in spring 2022 and substantially beneath the 795,000 recorded when the Covid pandemic began. Mr Papadakis suggested swift rate reductions “should support the economy in an otherwise tough period. For businesses, lower interest rates could provide some support to investment in 2026,” he said.

A Bank Rate of 2.75% would sit close to “neutral” – the threshold where the economy neither overheats nor stagnates – indicating Threadneedle Street may need to abandon its cautious approach to prevent a more severe downturn. A deteriorating employment market typically signals the green light for central banks to ease policy. Nevertheless, financial markets remain doubtful, pricing in reductions only to approximately 3.5% next year, potentially by June.

Rob Wood, chief UK economist at Pantheon Macroeconomics, argued there was “little reason” for the Bank to accelerate rate reductions in 2026. He also cautioned that policies unveiled by the Chancellor in the 2025 Budget – including fuel duty increases and fresh pay-per-mile levies on electric vehicles – would “lift inflation slightly in 2027 and 2028”.

“The market has taken a similar view,” he said. Others disagree. Capital Economics expects rates to fall to 3% next year. Its chief UK economist, Paul Dales, said the Budget “will drag on GDP growth, add to the downward pressure on inflation and mean interest rates may fall further than widely expected”.

Deutsche Bank predicts two further cuts to 3.25% by March and June. Its UK chief economist, Sanjay Raja, said a rise in unemployment from 5% to 5.3% in the next two ONS releases “could elicit some genuine concerns” and push the Bank into stronger action.

“Big picture, the case for faster rate cuts has not crystallised – not yet at least,” he said.

“Should the above conditions come to fruition, we think the case for faster and deeper rate cuts will strengthen. Ultimately, however, the case for faster rate cuts will rest on the evolution of the labour market.”