The Bank of England has kept its benchmark interest rate at 3.75% for a third consecutive meeting, leaving borrowing costs at their lowest level since February 2023.
Further cuts had been expected during 2026 after the rate fell from 4% in December 2025. However, higher energy prices linked to the war involving Iran have increased inflation risks and raised the possibility that the Bank’s next change could be an increase.
Why The Bank Changes Interest Rates
Bank Rate determines what the central bank charges commercial banks and building societies to borrow money. It influences mortgage, loan, credit card, and savings rates offered to customers.
The Bank adjusts rates to keep inflation close to the government’s 2% target. Higher rates are intended to reduce borrowing and spending when prices are rising too quickly.
UK inflation has fallen sharply from its October 2022 peak of 11.1%. The Office for National Statistics said consumer prices rose by 2.8% in the year to April 2026, down from 3.3% in March.
Cheaper household energy, food, and package holidays contributed to the decline. Since then, rising global fuel and energy costs have created new pressure on prices.
A Rate Increase Remains Possible
At its April policy meeting, the Bank’s Monetary Policy Committee voted 8–1 to hold the rate at 3.75%. One member supported an increase to 4%.
The Bank said further increases could be required if oil prices remain high and inflation persists. Governor Andrew Bailey said officials would closely monitor the conflict’s effect on the UK economy and work to return inflation to the 2% target after the initial energy shock passes.
However, higher rates are not certain. Weak economic growth and a softer jobs market could discourage the Bank from increasing borrowing costs.
Mortgages And Savings Feel The Impact
About 500,000 homeowners have tracker mortgages that move directly with Bank Rate. A further 500,000 are on standard variable rates, though lenders decide whether to pass on rate changes.
Around 87% of mortgage customers have fixed-rate deals, so their monthly payments do not change immediately. They may still face higher costs when their current agreements expire.
As of May 20, the average new two-year fixed mortgage rate was 5.73%, compared with 4.83% at the start of March. The average five-year rate had risen from 4.95% to 5.66%, while the average two-year tracker stood at 4.56%.
About 800,000 fixed-rate mortgages carrying rates of 3% or less are expected to expire each year, on average, through the end of 2027. Many borrowers leaving those deals could face higher monthly payments.
Savings returns also tend to follow Bank Rate. The average easy-access savings account paid 2.48% as of May 20, according to Moneyfacts.
The Bank’s next interest rate decision is scheduled for June 18. Officials will assess inflation, oil prices, employment, and economic growth before deciding whether to hold or change the rate.
Featured image credits: Magnific.com
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