Will interest rates drop? Tembo's base rate predictions

Key takeaways

• Despite earlier predictions of a cut in March, the Bank of England could now increase the base rate at some point in 2026.
• This change is driven by the conflict in the Middle East, causing a rise in oil prices, which is expected to drive up inflation as the fallout begins to fully trickle through the economy
• However, the recently signed peace deal between the US and Iran means that further increases to inflation over the coming months may be smaller than originally predicted.
• For now, the Bank of England will likely continue its “watch and wait” approach, holding the base rate at its current level for longer. But we could still see the base rate increase to 4% by the end of 2026.
• Prospective buyers should move quickly to secure deals while they still can, particularly those planning on buying in the coming months, as mortgage rates are likely to stay at their current level or increase.
• Much will ultimately depend on how long the conflict comes to a conclusion and how significantly it affects global energy markets.

What will happen to the base rate in 2026?

The market is currently predicting that the Bank of England will either hold the base rate at its current level for longer or increase it, rather than cut it as was previously thought. This switch in expectations is due to the surge in oil prices caused by the ongoing conflict in the Middle East, which has raised fears of inflation rising. In fact, Andrew Bailey, the governor of the Bank of England, has warned that “higher inflation is unavoidable”.

However, this rise to the base rate is unlikely to happen when the Bank of England's Monetary Policy Committee (MPC) next meets on the 30th July 2026. The recently signed peace deal between the US and Iran has shifted market expectations of inflation soaring this summer. Although inflation is still likely to rise as we see the full impact of the conflict trickle through to the economy, the increases may be smaller than originally predicted.

The MPC will likely want to use the July meeting to discuss the success of the peace deal, as by then its longevity should be clearer than it is now.

So while a base rate rise isn't off the table, it's likely to happen later on in the year after the Bank of England has seen what happens to inflation and how the US-Iran peace deal plays out.

When is the next Bank of England base rate decision?

The next Bank of England Monetary Policy Committee (MPC) base rate decision is scheduled for Thursday, 30th July 2026, when the MPC will announce whether the base rate will stay at 3.75%, move lower, or shift higher again.

Right now, the market is not expecting the base rate to be increased at this meeting, as the central Bank is still balancing above-target inflation against weak growth and rising energy uncertainty. At the last meeting, the Committee voted 7-2 in favour of holding rates, with only two members voting to increase rates.

Although the peace deal between the US and Iran has now been signed, the impact of the conflict is yet to be fully felt in the UK economy. Energy prices are still expected to be higher over the coming months, but inflation expectations for the end of the year are now lower than was thought back in April.

Higher energy prices may reduce the need for the Bank to raise rates further. This is because when energy prices rise, households and businesses spend more on electricity, gas, and fuel. That leaves less disposable income for other goods and services, leading to weaker demand, which in turn pulls down underlying inflation pressure elsewhere (even if energy itself is more expensive).

Why is the Bank of England expected to hold rates now?

The conflict in the Middle East, although now ended, pushed up oil prices. This is expected to cause inflation to start rising again over the summer as the full effect trickles into the UK economy, having a knock-on effect on the cost of everyday essentials. The Bank of England will likely hold off on cutting the base rate until inflation starts falling again, and is even expected to increase it to try to bring inflation down, but this isn't expected until later in 2026.

But remember that mortgage lenders tend to price in base rate rises before they happen, so we could see mortgage rates increase before the base rate actually moves.

How do base rate changes affect mortgage rates?

The Bank of England base rate is one of the main drivers of mortgage pricing in the UK, but it doesn’t feed through in a simple 1:1 way. When the base rate goes up, lenders’ borrowing costs typically rise too, so lenders usually pass on these higher costs to their customers by raising their own mortgage rates. So the rates offered on new mortgage deals for new borrowers, and homeowners coming to the end of their fixed rate deals looking to remortgage, may rise.

When the base rate falls, the opposite tends to happen; lenders can access cheaper funding, which often translates into lower mortgage rates over time.

However, the base rate isn't the only thing which lenders take into consideration when deciding how to price their mortgage products. Fixed mortgage rates in particular are priced based on what lenders think will happen to the base rate in the future, as well as broader factors like inflation forecasts, gilt yields (government bond rates), and competition between lenders.

This is why you sometimes see mortgage rates falling even before the Bank of England cuts rates, as markets are already pricing in expected reductions.

Variable and tracker mortgages are more directly affected. Tracker mortgages move almost in lockstep with the base rate (typically base rate + a set margin), so changes are passed on quickly. Standard variable rates (SVRs) also tend to move after base rate changes, but lenders have discretion over timing and size.

How will a base rate rise affect mortgages?

The base rate influences the interest rates mortgage rates offer on their own deals. So if the base rate does rise, mortgage rates are likely to remain steady at their current level, if not increase, depending on what happens to inflation.

When will mortgage rates fall?

Although we've seen some major lenders cut mortgage rates in recent weeks, this is unlikely to be a sign of a downward trend. Instead, this is reflective of lenders readjusting their mortgage deals in line with the latest expectations for inflation and the base rate, on the back of the peace talks related to the conflict in the Middle East.
In response, we’ve seen a noticeable surge in demand from borrowers who are keen to lock in lower rates before further increases take effect. Many prospective buyers are moving quickly to secure deals while they still can, particularly those who had already been planning to purchase in the coming months.

With that said, much will ultimately depend on how long the conflict continues and how significantly it affects global energy markets.

Here's what the base rate rise could mean for you:

• Fixed-rate mortgages: If your fixed deal is ending, or you’re hoping to buy soon, you might find you are now offered higher mortgage rates than you were a few months ago. But this doesn't mean buying is impossible, but it's important to understand what rate you could get and lock in while you can, as mortgage rates may change quickly. 
• Variable-rate mortgages: Average standard variable rates (SVRs) are still sitting well above both newly priced fixed-rate deals and tracker mortgages, meaning borrowers who revert to their lender’s SVR at the end of a fixed-rate deal may face a sharp increase in monthly repayments. Don't bury your head in the sand; see what options you have now.
• Coming to the end of a fixed-rate deal? You might find that the deal you had your eye on is no longer available, and the new rates you're eligible for are higher than a few weeks ago.

In times like this, it's important to seek expert advice and lock in on the best mortgage deal available to you while you can. Remember, mortgage offers typically last between 3-6 months, and with Tembo's rate checking service, you can reapply at no extra cost if rates drop down the line.

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

What's the outlook for the housing market?

Expectations have shifted dramatically since the conflict in the Middle East escalated in late February. Before then, the market was expecting 2026 to bring lower inflation and falling mortgage rates, which could have sparked life back into the property market.

Now, average mortgage rates have climbed to above 5% for the first time since late 2024, with lenders like Barclays and Nationwide pulling their sub-4% rates to quickly reprice amid the turmoil. The cheapest deals now have a shelf life of a couple of days, so if you're exploring your options, it may be worth locking in a deal before it is withdrawn from the market.

Although things have calmed down, we're unlikely to see mortgage rates dramatically come down any time soon. With much resting on the fallout of the Middle East conflict on the UK economy, we may see buyers, including home movers, choose to sit on the sidelines, waiting for more stable waters.

This dampener on demand could impact house price growth, increasing by a marginal amount over 2026 or potentially decreasing. Regions with the most stretched affordability, like London and the South East, are expected to see the sharpest price pressure from rising mortgage rates, so are likely to be the hardest hit by any house price declines.

However, this doesn't mean it'll be impossible for you to buy this year. Wages are currently growing faster than house prices, which helps offset some of the increased monthly mortgage costs for new buyers. This improves affordability for buyers, helping to make homeownership possible even in uncertain times.

Plus, despite the negative headlines, buyer confidence appears to be holding up for now. At Tembo, we've seen customer enquiries remain strong, and the positive momentum in the housing market so far in 2026 is continuing. While mortgage rates are once again on an upward trajectory, it hasn’t yet translated into a slowdown in people looking to buy or move home.

What about saving rates?

While higher interest rates are difficult for borrowers, they can be good news for savers. We've seen savings rates remain relatively strong compared to the ultra-low levels seen a few years ago, especially on tax-efficient accounts like easy access Cash ISAs, with some of the top rates as high as 4.05% AER (variable).

Now is the time to make the most of your tax-free ISA allowance by opening a new account or switching providers to make the most of the best rates. It might make sense to look at transferring to a provider offering the best rates or locking in a fixed-rate deal soon. 

What should you do next?

It's impossible to predict if mortgage rates will start to track upwards again or how long current deals will stay available. Despite holding the base rate this month, the Bank has indicated there could still be scope for rate cuts later in 2026 if inflation falls. However, much will depend on if energy prices remain elevated and inflation rises again, as the Bank may keep interest rates higher for longer or raise the base rate again.

Change can be confusing, but you don’t have to figure it out on your own. If you want help finding the best mortgage deal for you, we’re here.

Bank of England MPC meeting dates 2026

• 30th July 2026
• 17th September 2026
• 5th November 2026
• 17th December 2026