Will interest rates drop? Tembo's base rate predictions

Key takeaways

• After cutting to 3.75% in December 2025, the Bank of England is expected to further cut the base rate to around 3.25%-3.5% by mid-to-late 2026.
• Inflation is easing, now at 3.2%, and could fall to 2.5% by late 2026.
• Mortgage rates are dropping, with some fixed rates the lowest since 2022. Homeowners, home movers and first-time buyers could see better rates and lower monthly payments.
• Mortgage rates should continue to fall in 2026, but likely not until the middle of the year. While house prices are likely to stay sluggish, impacting available housing stock.
• After the December base rate cut, savings rates have started falling, so savers might want to review their options soon and make the most of competitive rates available right now

What will happen to the base rate in 2026?

It's expected that the Bank of England will cut its base rate further in 2026, possibly to around 3.25%-3.5% by mid-to-late 2026, although some are expecting a rate cut as early as March. Some are even more hopeful, predicting the base rate to reach 3% by the end of the year.

Why is the Bank of England expected to cut rates?

The main reason the base rate is expected to go down in 2026 is due to falling inflation. Latest data shows that inflation dropped to 3.2% in November 2025, down from 3.6% in October. This continues the sharp fall from the 41-year high of 11.1% back in October 2022.

With inflation edging closer to the government's 2% target, the need for high interest rates is fading fast. Experts predict inflation will keep dropping, possibly hitting 2.5% by late 2026.

As a result, it's looking likely that the Bank of England will cut the base rate further to 3.5% or even 3.25% in 2026, although some are predicting it could drop as low as 3%!

But the pressure isn’t gone just yet. Although food price inflation fell month-on-month, grocery prices are still rising at an annual rate of 4.2%. Still, the economy is steadying, making a base rate cut more likely.

How will a base rate drop affect mortgages?

This is good news if you own a home or want to buy one in 2026. But remember that lenders usually cut rates before a base rate cut is announced. This is why we saw mortgage rates drop before the base rate cut on the 18th December 2025. With more base rate cuts expected in 2026, it's likely we'll see mortgage rates continue to drop ahead of this.

Here's what a base rate cut in 2026 could mean for mortgage rates:

• Fixed-rate mortgages: Lenders are already racing to offer better deals, with some top lenders offering fixed rates from just 3.55%, as low as deals offered in 2022. This mortgage price war means borrowers have more options and lower monthly costs.
• Variable-rate mortgages: If you have a variable-rate mortgage, further base rate cuts could lower your payments more.
• Coming to the end of a fixed-rate deal? You now may have better options when you remortgage vs a couple of months ago. Grabbing a new, lower rate can mean real savings over time.

You might also like: How long should I fix my mortgage for?

What's the outlook for the housing market?

After a slow second half of 2025, lower inflation and falling mortgage rates could spark life back into the property market in 2026. But with changes to taxes after the budget and real wages not keeping up with inflation, affordability will still be stretched for many. Plus, with sluggish house price growth, we could see aspiring home movers hold off selling, impacting the supply of new homes to the market for first-time buyers.

Despite this, homeowners with upcoming remortgages will still be hunting for the best deals as their fixed-rate deals come to an end to avoid going onto the lender's costly SVR. Some will also remortgage to move to a further advance mortgage, or to consolidate debt. While specialist mortgages like guarantor schemes will also continue to help aspiring home buyers plug the gap between what they need and what they can afford alone.

Keep reading: Tembo's mortgage rate predictions for 2026

What about saving rates?

A base rate cut is great for borrowers, but less so for savers. Higher rates have given savers better returns in recent years, making savings accounts much more attractive.

As the base rate drops, savings account rates have followed. If you’ve enjoyed bigger returns lately, it might make sense to look at transferring to a provider offering the best rates, or lock in a fixed-rate deal soon. 

What should you do next?

Further base rate cuts are a big deal for the UK economy. Homeowners on variable rates or upcoming remortgages could see real relief, lower payments and better deals. While first-time buyers have a new window of opportunity, as lower rates mean it’s easier to afford your first home, even with a small deposit.

For savers, this marks a turning point. Savings rates may start to dip, so act soon if you want to secure a good rate by transferring to another provider, or consider opening a new account with a competitive interest rate.

Change can be confusing, but you don’t have to figure it out on your own. If you want help buying your first home, remortgaging, or making sense of what’s happening in the market, we’re here for you.