The base interest rate remained at 3.75% throughout 2026 with policymakers at the Bank of England’s Monetary Policy Committee choosing to keep borrowing rates unchanged.
But with inflation at 3.5%, far from its 2% target, and with prices expected to rise further due to higher oil and energy prices, a decision to raise interest rates has become inevitable.
In fact, the Office for Budget Responsibility (OBR) has forecast that inflation will peak near 4% early next year.
Danny Hewson, head of financial analysis at AJ Bell, said: “It is hard to believe that at the start of the year households were expecting a very different economic picture to the one they ended up with.
“Markets had been anticipating at least two key rate cuts in 2026, with inflation expected to reach the Bank of England’s 2% target by mid-spring.
“Instead, borrowers are bracing for at least one more rate hike before the clock strikes midnight in this turbulent year, and consumer confidence has been hurt by the prospect of increasingly higher rates in the wake of the ongoing conflict in the Middle East.”
She added: “The price of oil remains stubbornly high, the cost of goods entering and leaving UK factory gates is rising, and inflation remains well above the bank’s 2% target for the whole of 2026.
“With three members of the nine-strong committee already pushing for a rate hike at the last meeting, and the UK economy continuing to show resilience, the case for stability is losing steam.”
What does this mean for your mortgage?
If interest rates rise by the expected 0.25% to 4%, those with tracker mortgages will see the hit almost immediately.
For anyone looking at the fixed rate, while a rate rise may seem worrying, most lenders have already “priced in” the expected rise this week.
“Swap rates move according to what financial markets expect will happen to interest rates in the future, not what they are today,” said Nick Mendes, technical director of mortgages at John Charcol.
Markets expect the Bank of England to raise interest rates several times over the next 18 months, from 3.75% today to about 4.75% by the middle of next year.
“This is why fixed mortgage interest rates have risen even though the Bank of England has not changed interest rates.”
So the advice to anyone taking out a mortgage in the next six months is to act soon and secure the deal.
You can start looking for a new deal up to six months before your current mortgage expires. If you secure a new deal and then prices drop, your broker can help you find a better deal before it closes.
