Interest rates could remain at 4% until 2026, economists say

UK interest rates are set to be held at 4% until 2026 as lingering concerns about the economy prompt policymakers to act cautiously, economists have said.

The Bank of England’s Monetary Policy Committee (MPC) will announce its latest decision on Thursday.

The central bank is widely expected to keep rates at 4% after cutting them from 4.25% in August.

Economists believe the MPC may avoid cutting rates at meetings in November and December, meaning the figure could be kept on hold until February.

This would be a setback for mortgage holders with millions still expected to refinance on to higher rates in the coming years.

Thomas Pugh, chief economist for auditing firm RSM UK, said: “It’s all but guaranteed that the Bank of England will hold interest rates at 4% at its meeting on Thursday.

“The committee will stick to its gradual and cautious guidance, as it continues to try to balance rising inflation with a weakening labour market.”

UK Consumer Prices Index (CPI) inflation rose to 3.8% in July, from 3.6% in June, meaning it remained at the highest level since January 2024.

This was largely driven by food and drink prices rising, while overall wage inflation has remained at 5%, according to the latest data from the Office for National Statistics.

Interest rates are used by the MPC to control inflation and bring it down to the 2% target.

The UK labour market has been stagnating with the unemployment rate remaining at a four-year high and job vacancies continuing to decline.

Philip Shaw, an economist for Investec, said he was expecting rates to be held at 4% until the end of the year, with the next cut in February.

He said recent economic data will be “unlikely to disperse the committee’s collective doubts over whether the inflationary coast is clear to resume easing” monetary policy by November.

Rob Wood and Elliott Jordan-Doak, economists for Pantheon Macroeconomics, said recent remarks from the Bank’s governor Andrew Bailey indicated he was happy with the financial markets pricing in only a 40% chance of another rate cut this year.

“The late Budget will likely also encourage the MPC to wait until December at least before considering another cut,” they said.

“We expect little change to the MPC’s guidance from August, given the hawkish dataflow and MPC members’ comments suggest little reason or desire to change their position from early August.”

In August, policymakers emphasised future rate cuts will need to be made “gradually and carefully” amid uncertainty about the economic outlook.

Chancellor Rachel Reeves is due to deliver her autumn Budget on November 26, and is widely expected to raise taxes to balance the books.