Financial markets are not yet forecasting any interest rate cuts from the Bank of England in 2026 after a quarter-point cut as recently as December, the fourth reduction in rates in 2025. But with inflation expected to keep falling and the jobs market weakening, economists still expect the Bank of England to continue cutting rates in 2026.
“Changes are afoot, with labor conditions finally beginning to cool in response to interest rates, which remain high,” Morningstar’s Monika Calay, Grant Slade and Mark Preskett say in their 2026 Global Outlook.
“With the degree of economic slack gradually widening, the Bank of England now has greater scope to lower interest rates—and we expect meaningful monetary easing throughout 2026 and beyond.”
At 3.75%, the Bank of England’s base rate is currently the highest of the G7 central banks, including the US Federal Reserve, the European Central Bank, the Bank of Canada, and the Bank of Japan. In Europe, only Norway’s central bank has a higher base rate than the UK.
The Case for Further BoE Rate Cuts
The base case for falling UK interest rates falling in 2026 rests on a number of key data points. UK domestic product growth is sluggish, unemployment is rising and wage growth abating, and inflation appears to be falling once more towards target. The Bank of England has already said that inflation has peaked, with CPI falling back to its 2% target faster than previously estimated. In November, inflation came in lower than expected at 3.2%.
At its latest Monetary Policy Committee meeting in December, the BoE said that Autumn Budget changes, as well as some downward moves in sterling oil and gas futures, had led Bank staff to “lower their expectation for CPI inflation to closer to 2% in 2026 Q2.” Previous forecasts had inflation falling back to the 2% target in 2027.
Investors will now have to wait for a further Office for National Statistics bulletin on Jan. 21, covering the 12 months to December 2025, for another insight into cost of living changes. The next MPC meeting will then take place on Feb. 5, where the Bank will make its first decision of 2026 on rates.
“Inflation is easing more quickly than expected and unemployment is rising, supporting the case for cuts,” says BlackRock Investment Institute UK chief investment strategist, Vivek Paul.
“Stubborn wage growth will constrain how far the Bank can cut. With macro anchors like stable growth and inflation adrift, markets tend to overreact to incoming data—so investors should be wary of reading too much into every new data release.”
Other economists agree on the case for further cuts.
“Fundamentally, the Bank—or most officials at least—still thinks further cuts are likely. It has not changed our mind that the Bank will cut rates twice more next year,” say James Smith and Chris Turner, developed markets economist and global head of markets at ING, in a note.
Is the UK Now Close to Terminal Interest Rates?
With an Autumn Budget in late November 2025 that raised taxes to their highest level as a share of gross domestic product—and some uncertainty still surrounding the UK’s economic data and the outcome of the local elections in May—it’s currently difficult to tell exactly what will happen to interest rates in 2026.
Investors have been here before. In 2024 the Bank of England confounded expectations of four rate cuts by lowering the bank rate just twice, despite inflation initially hitting the Bank’s 2% target in May of that year. It led investors to be more measured about their predictions in 2025. In the end, the Bank reduced interest rates to 3.75% in December 2025, its fourth cut of the year.
As the BoE approaches the so-called “terminal rate”—the rate at which MPC members believe interest rates are high enough to keep inflation at target and low enough to stimulate economic activity—predicting the future is harder.
“The ECB is a good example of how markets traded the proximity of the terminal rate with caution through Q3. This logic seems have been lost on the UK rates trading community, who have taken every opportunity to price in as many rate cuts as possible,” Bank of America analysts say in a note.
“The very fact that the UK is entering terminal rate territory will naturally lead to increased caution and an increasing data dependency approach. This is where the rates market could come foul of the data once more.”
Which UK Stock Sectors Would Benefit Most From UK Interest Rate Cuts?
If the Bank does continue its rate cutting cycle in earnest, plenty of sectors, and consumers themselves, stand to benefit.
“The UK has suffered from a higher cost of capital than its peers for a number of years; a decline in financing costs will be particularly supportive for interest rate-sensitive industries,” says George Godber, comanager of the Polar Capital UK Value Opportunities fund.
“Indeed, sectors such as REITs, in which lower yields will directly enhance valuations; housebuilders, in which reduced mortgage rates will provide a meaningful tailwind; UK consumer spending; food producers; and diversified financials are likely to see improved prospects.
“We also believe that the refinancing headwind for mortgages, which has so plagued the UK consumer for the past few years, will finally burn out over the course of the year, enabling real income growth to be diverted into real spending growth.”
Will The Bank of England Cut Rates in 2026? Key Dates for Investors
According to the latest interest rate swaps data, markets expect the Bank of England to hold rates at its upcoming Monetary Policy Committee meetings in February, March and April. April’s MPC meeting looks the most likely occasion for a cut, with a near 47% probability.
The Bank of England will make interest rate announcements on the following dates in 2026:
Thursday Feb. 5.Thursday March 19.Thursday April 30.Thursday June 18.Thursday July 30.Thursday Sept. 17.Thursday Nov. 5.Thursday Dec. 17.
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