No change to interest rates – but outlook is bleak
The Bank of England has kept interest rates unchanged for the fifth meeting in a row but has indicated it could raise them if the Iran war escalates.
“(The Bank of England, ‘expects inflation – the rate at which prices rise – to pick up due to volatile oil and gas prices caused by the Middle East conflict, although the peak will be slightly lower than previously thought. The Bank voted to hold interest rates at 3.75% at its latest meeting.
Bank of England governor Andrew Bailey warned the future of UK interest rates depended on whether the US led war against Iran continues. While major uncertainties remain because of the war, the Bank predicts the UK economy will grow this year by more than previously forecast.
Bailey told the BBC: “If we get a continuation of this conflict going on and oil prices stay above $100 a barrel… the odds are that interest rates will have to go up higher.” But he also said if a ceasefire, and memorandum of understanding, is established and sticks that would make a difference.
“So it depends on how the events in the Middle East, frankly, unfold. And sadly, we all know this is highly unpredictable,” Bailey said. “What goes on in the Gulf is not, I’m afraid, under our control.” Three members of the Bank’s nine-member rate-setting committee voted for a hike, one more than the previous meeting – with that member explicitly citing the collapse of the US-Iran memorandum of understanding for their vote to raise rates.” – (Source – BBC News Faisal Islam Dearbail Jordan reporters)
Ben Nichols, CEO of RAW Capital Partners: “This decision will come as a relief to borrowers. Such has the turn around in economic conditions been in the past six months that while previously the property market was expecting steady base rate cuts, today a hold feels like a victory.
“While strikes in the Strait of Hormuz have added upwards inflationary pressure and oil prices remain volatile, the annual inflation rate has been slowing more than expected in recent months. This has allowed the MPC to provide some continuity for brokers and borrowers by holding interest rates for the fifth consecutive time. Such stability is to be welcomed during a period of political and economic volatility.
“But there remain doubts as to how long we can stay in this holding pattern. Many economists expect interest rates to rise later in the year. The extent of that rise will be determined by several key factors, most notably: how the conflict in the Middle East unfolds and what this means for oil prices, and how the market responds to the policies of the new Andy Burnham government, including the Autumn Budget. Lenders and brokers must be agile in responding as these events unfold throughout the second half of the year, ensuring borrowers have both the support and products they need to act with confidence.”
What the Bank of England is saying
‘If interest rates rise, borrowing could become more expensive for you. Whether you are looking to get a mortgage to buy a house, or a new car on credit, it is crucial to think about what higher costs mean for you.
Imagine you have a £130,000 mortgage that you want to pay off over 25 years. If the interest rate on it is 2.5%, the monthly repayment will be £583. But if the interest rate is 3.5%, the monthly repayment will be £651. Of course, interest rates can go down as well as up. If the mortgage interest rate was 1.5%, the monthly repayment would be about £520.
It is key to understand how a change in interest rates could affect your ability to pay. You can use a mortgage calculator to work out how your monthly payments could change.’ – source Bank of England website.
‘Interest rates influence how much people spend, and that affects how shops and businesses set their prices.
Higher interest rates mean higher payments on many mortgages and loans, meaning people must spend more on them and less on other things. Saving becomes more attractive because the returns are higher and it becomes more expensive to take out a loan. These things all discourage consumers and businesses from spending. When customers spend less, businesses are less willing or able to raise their prices. When prices don’t go up so quickly, inflation falls.
Lower interest rates can have the reverse effect. If payments on mortgages and loans go down, people will have more money to spend on other things. Savers will get a smaller return and, therefore, may feel less motivated to put their money away. It will be also cheaper for potential borrowers to take out a loan – and use that money to make big purchases.
All of these factors encourage spending. When people spend more, this means demand is high. And when demand is high, businesses often raise their prices, pushing up inflation.
We started raising interest rates at the end of 2021 to help control inflation. Since then, it has fallen a lot and the pressures that caused price rises had eased. As a result, we were able to start reducing interest rates in August 2024 from 5.25% down to 3.75% in December 2025.
However, this was before war broke out in Iran and the Middle East. This has disrupted the transportation and supply of oil and gas and pushed up energy prices. Unfortunately, this means inflation (2.6% in June 2026) will probably rise this year. Monetary policy cannot affect global energy prices; our job is to make sure that higher inflation does not persist and have long-lasting effects on the economy. We are monitoring the situation closely and will do what is necessary to make sure that inflation stays on track to meet the 2% target in the medium term.
How do interest rates affect inflation?
Interest rates influence how much people spend, and that affects how shops and businesses set their prices. Higher interest rates mean higher payments on many mortgages and loans, meaning people must spend more on them and less on other things. Saving becomes more attractive because the returns are higher and it becomes more expensive to take out a loan. These things all discourage consumers and businesses from spending.
When customers spend less, businesses are less willing or able to raise their prices. When prices don’t go up so quickly, inflation falls. Lower interest rates can have the reverse effect. If payments on mortgages and loans go down, people will have more money to spend on other things. Savers will get a smaller return and, therefore, may feel less motivated to put their money away. It will be also cheaper for potential borrowers to take out a loan – and use that money to make big purchases.
All of these factors encourage spending. When people spend more, this means demand is high. And when demand is high, businesses often raise their prices, pushing up inflation.
We make our decision on interest rates every six weeks or so. Each time, we look at the state of the economy and recent global developments, and what we expect for the coming months. The factors we consider include:
- how fast prices are rising
- how the UK’s economy is growing
- how many people are in work
We will announce our next decision on Thursday 17 September 2026. You can see our full list of upcoming dates along with links to our more detailed reports.’ – source Bank of England website.
Andrew Stanton CEO Proptech-PR
