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The Bank of England reduced the base rate to 3.75% in December 2025 – and rates are expected to fall further in 2026.
Interest rates influence almost every part of your finances – from savings and borrowing to investments and retirement income. Understanding where rates are heading can help you plan your finances for the year ahead.
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At 3.75%, the base rate is now at its lowest in nearly three years. Bank rate was increased from 3.5% to 4% in February 2023, with a series of rate rises taking it to 5.25% by August 2023. A series of cuts begun in summer 2024.
In January 2025, Capital Economics predicted that the base rate would fall gradually from 4.75% to 3.75% by the end of 2025– and that is exactly what has happened.
2025 saw cuts in February, May, August and December, with the latest rate cut on December 18 providing a clear signal that the Bank of England sees inflationary pressures easing.
There are three broad possibilities for how interest rates might evolve over the next year.
Early in 2025, the Bank of England set out a clear direction of travel – a slow and steady cutting cycle. This has been the case so far and looks likely to continue as we move into 2026. Around two-thirds of economists polled by Reuters expected a follow-up cut in bank rate to 3.50% by the end of March 20261.
The second possibility is a long pause. If inflation proves stubborn, the bank may decide that the most recent cut is enough for now. In that case, rates could stay close to 3.75% throughout much of 2026.
The third, less likely, scenario is faster cutting. A sharp economic slowdown or rising unemployment could force the bank to act more aggressively.
Experts generally agree that 2026 will see slow and steady rate cuts. The Bank of England itself has said that any further loosening will still be “gradual”, allowing it to assess incoming data on inflation, jobs and the general economy.
Ed Monk, pensions and investment specialist at Fidelity International, says: “Markets are pricing in one further quarter-point cut in the first half of 2026 but the picture beyond that is less certain. However, the chances of a second cut next year are increasing.”
Some pundits are more optimistic, with some predicting the base rate could be as low as 3% by the end of 2026.
Luke Bartholomew, deputy chief economist at Aberdeen Investments, says: “With the economy set to remain weak into next year, and various measures in the recent Budget designed to push down on headline inflation, we think there are more rate cuts to come, with bank rate eventually heading back towards 3% late next year."
Hetal Mehta, chief economist at St. James's Place, says: "The bank now has a delicate balancing act to negotiate. Inflation is above target and wage growth above 4% meaning that an aggressive cutting cycle – several back-to-back cuts or even 50bps cuts – could risk an inflation reversal. On the other hand, pulling further on the monetary string may well choke off what little economic growth there is."
The most likely scenario for interest rates in 2026 – a couple of 0.25 percentage point rate cuts – is good news if you (still) have a mortgage. A base rate cut should gradually feed through into cheaper mortgage rates, particularly for tracker mortgages and new fixed rate deals. Lenders have already been adjusting their pricing in anticipation of easier policy, and competition is helping to push rates lower.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “Those remortgaging in the next few months have a free throw of the dice as rates can be booked up to six months before you need them. You can book a rate now and review prior to completion – if rates have fallen by then, you can enquire about switching to lower rate. If not, you can keep what you have.”
For savers, the news is mixed. Over the past two years, higher interest rates have finally delivered decent returns on cash savings after more than a decade of meagre yields. Easy-access accounts paying 4% or more have become common, and fixed-rate bonds have offered even better deals.
If the bank trims rates further over the next 12 months, savings rates will gradually follow and savers should be prepared for this.
Mike Ambery, retirement savings director at Standard Life, says: “It’s sensible to keep some easy-access cash for everyday needs and emergencies, but once that’s covered, relying on cash alone might not be enough. Looking at longer-term options – such as pensions, which remain one of the most tax-efficient ways to save, or other investments – can help your money work harder, protect its value, and support your financial security as the interest rate landscape shifts.”
Higher interest rates over the past couple of years have improved annuity incomes, allowing those converting pension pots into guaranteed income to secure better deals than in the recent past. If rates fall in 2026, annuity rates may soften, although they are unlikely to return to the low levels of a few years ago.
Those using drawdown face a different calculation. Lower interest rates can support investment markets, which may benefit pension pots invested in shares and bonds. But they can also reduce the income available from low-risk assets such as cash and gilts.
Interest rates are widely expected to keep edging down in 2026. That could mean lower returns on cash savings and slightly weaker annuity rates for those buying one, while mortgages may get cheaper.
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