What's happened
Analysts predict the Bank of England will cut interest rates once in 2026, following a year of multiple cuts in 2025. The economy shows signs of slowing, with inflation falling faster than expected, and mortgage rates already decreasing. Experts see a cautious outlook for the coming year.
What's behind the headline?
The Bank of England’s rate cuts in 2025 reflect a cautious approach to economic recovery, with policymakers balancing inflation control against growth concerns. The predicted single rate cut in 2026 indicates a shift towards stabilisation, as the economy faces headwinds from high public deficits and volatile global markets. Lower inflation and falling mortgage rates will benefit consumers, especially those refinancing existing deals, but the overall outlook remains fragile. The focus will shift to labour market health and household spending, which will determine whether the UK can sustain a recovery without further policy easing. The cautious stance from Governor Bailey and the potential for a price war among lenders suggest mortgage rates could fall below 3% early next year, but the risk of bond market volatility persists. Overall, 2026 will test the resilience of the UK economy, with limited policy manoeuvres and a need for structural reforms to foster sustainable growth.
What the papers say
The Scotsman reports that analysts expect only one further rate cut in 2026, citing the Bank of England's cautious stance and recent economic data. The article highlights that despite multiple cuts in 2025, inflation has fallen faster than anticipated, and mortgage rates are already near 3%. Meanwhile, the NY Post discusses the Federal Reserve's approach, with Chair Hammack opposing recent rate cuts due to inflation concerns, emphasizing the need for a tighter monetary policy until inflation recedes further. The Independent notes that the Bank of England’s rate cut to 3.75% was driven by inflation dropping to 3.2%, and forecasters predict inflation could fall to 2% by April 2026, supporting a more stable interest rate environment. Both sources agree that the coming year will see limited policy adjustments, with mortgage rates likely to decrease further, benefiting borrowers, but economic uncertainties remain due to global volatility and fiscal deficits.
How we got here
Throughout 2025, the Bank of England cut interest rates four times, aiming to stimulate growth amid slowing economic activity and falling inflation. Official figures show UK GDP growth slowed in the third quarter, with revised data indicating weaker performance in manufacturing and household savings. The government’s fiscal policies and external shocks, like a cyber attack on Jaguar Land Rover, contributed to the economic slowdown. Experts forecast that interest rate cuts will be limited in 2026, with the economy relying more on fundamental strengths like wage growth and lower inflation.
Go deeper
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In economics, inflation is a general rise in the price level of an economy over a period of time.
When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power