What’s happening to UK interest rates and what does it mean for mortgages?
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The Bank of England has held UK interest rates at 3.75% for a fifth time, keeping them at the lowest level since February 2023.
Before the US-Israeli war with Iran, rates had been expected to fall in 2026, but the economic fallout from the conflict has pushed up inflation across the globe, making cuts unlikely.
Interest rates affect mortgage, credit card and savings rates for millions of people.
What are interest rates and why do they change?
An interest rate tells you how much it costs to borrow money, or the reward for saving it.
The Bank of England’s base rate is what it charges other banks and building societies to borrow money, which influences what they charge their own customers for mortgages as well as the interest rate they pay on savings.
The Bank moves its base rate up and down in order to keep UK inflation — the rate at which prices are increasing — at or near 2%.
When inflation is above that target, the Bank typically puts rates up.
The idea is to encourage people to spend less, reducing demand for goods and services and limiting price rises.
What is happening to UK interest rates and inflation?
The Bank of England’s base rate rose to 5.25% in 2023. It remained at that level until August 2024, when the Bank started cutting.
Five cuts brought rates down to 4%, before the Bank held rates at its meetings in September and November 2025.
It then cut in December 2025 before holding rates steady in January, March, April, June and July 2026.
Meanwhile, the main UK inflation measure, CPI, has dropped significantly since the high of 11.1% recorded in October 2022 as a result of the war in Ukraine.
It was 2.9% in the year to July 2026, up from 2.6% the previous month.
The Office for National Statistics (ONS), which tracks UK inflation, said the uptick was a result of higher energy costs.
The US-Israel war with Iran has put up energy and fuel costs around the world which has increased the pace of price rises more generally.
What is expected to happen to UK interest rates?
At the start of the year, the Bank had been expected to cut interest rates twice in 2026, with the first drop predicted to come in March or April.
However, the increase in fuel prices and inflation after the outbreak of the conflict has upended all of this. Oil prices initially rose sharply as a result of disruption to supplies in the region, but dropped back when various ceasefires were agreed.
Oil prices rose again when the US and Iran resumed attacks in the Strait of Hormuz in July.
“Inflation has fallen faster than we’d expected, but the conflict in the Middle East continues to mean high and volatile energy prices,” said the Bank’s governor, Andrew Bailey.
“That will cause inflation to rise again later this year. However the conflict unfolds, our job is to make sure any increase in inflation is temporary and that it comes back to our 2% target.”
UK household energy bills rose after the latest increase in the price cap which took effect on 1 July, which could push UK inflation higher.
Given the uncertainty, many analysts think rates are likely to stay at 3.75% for the foreseeable future.
How do interest rate cuts affect mortgages, loans and savings rates?
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Just under a third of households have a mortgage, according to the government’s English Housing Survey.
About 500,000 homeowners have a mortgage that “tracks” the Bank of England’s rate. That means any cut means a reduction in the monthly repayments on their outstanding loan.
An additional 500,000 homeowners on standard variable (SVR) rates rely on their lender choosing to pass on any Bank rate cut.
But the vast majority of mortgage customers – some 87% – have fixed-rate deals. While their monthly payments aren’t immediately affected by a rate change, their future deals are.
As at 30 July, the average rate on a new two-year fixed deal was 5.62%, up from 4.83% at the start of March, according to the financial information service Moneyfacts.
For those looking for a five-year deal, the average rate was 5.66%, up from 4.95% over the same period.
The average two-year tracker rate was 4.51%.
About 800,000 fixed-rate mortgages with an interest rate of 3% or below are expected to expire every year, on average, until the end of 2027. Borrowing costs for customers coming off those deals are likely to rise sharply.
You can see how your mortgage may be affected by future interest rate changes by using our calculator:
Bank of England interest rates also influence the amount charged on credit cards, bank loans and car loans.
Lenders can decide to reduce their own interest rates if Bank cuts make borrowing costs cheaper.
However, this tends to happen very slowly.
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The Bank base rate also affects how much savers earn on their money.
A falling base rate is likely to mean a reduction in the returns offered to savers by banks and building societies and vice versa.
As at 29 July, Moneyfacts said the average rate for an easy access savings account based on a balance of £10,000 was 2.55%. The average rate for an easy access cash ISA was 2.73%.
The average rate for customers who were prepared to lock their money away for a year was 4.27%.
Cuts in rates particularly affect those who rely on the interest from their savings to top up their income.
What is happening to interest rates in other countries?
In recent years, the UK has had one of the highest interest rates in the G7 – the group representing the world’s seven largest so-called “advanced” economies.
In June 2024, the European Central Bank (ECB) started cutting the main interest rate for the eurozone from an all-time high of 4%, falling to 2% in June 2025.
However, in June 2026, the ECB raised rates to 2.25% as it reacted to the Iran war.
The US central bank – the Federal Reserve – has cut interest rates three times since September 2025, taking them to the current range of 3.5% to 3.75%, the lowest since 2022.
The Fed most recently voted to hold rates at that level at its July meeting, the second under new chair Kevin Warsh.
US President Donald Trump had repeatedly attacked the previous Fed chair Jerome Powell for not cutting rates.
Warsh is expected to be generally more supportive of cuts, but will also have to respond to the fallout from the Iranian conflict.
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