UK interest rates explained: why aren’t they falling and what does it mean for households?

What are interest rates and why do they matter?

Interest rates are the cost of borrowing money. In the UK, they are set by the Bank of England and influence mortgages, loans, and savings.

When rates rise, borrowing becomes more expensive and spending slows. When they fall, borrowing is cheaper and economic activity is supported. For households, the most immediate impact is on mortgage repayments.

Why were interest rates expected to fall and why haven’t they?

After a period of high inflation, interest rates were raised sharply to bring prices under control.

Now that inflation has eased and growth is weak, many expect rate cuts to support the economy in 2026. Under normal conditions, this would be a typical policy response.

But that has not happened, and the answer lies largely outside the UK.

Rising geopolitical tensions, particularly in the Middle East, have pushed up global energy prices.

A key concern is disruption to oil flows through critical routes such as the Strait of Hormuz.

Higher energy prices feed directly into inflation through:

• petrol and transport costs
• household energy bills
• food and goods prices

This means inflation risks are increasing again, even though domestic demand is weak.

Why is the Bank of England keeping interest rates high?

Because cutting rates too soon could allow inflation to become more persistent.

Policymakers are concerned about so-called “second-round effects”, where higher energy costs lead to higher wages and broader price increases. If this happens, inflation could remain elevated for longer.

The situation is difficult because interest rates can influence demand in the UK economy, but they cannot directly control global energy prices. The Bank therefore has to balance the risk of persistent inflation against the damage that higher borrowing costs can do to a weak economy.

By cutting rates too soon, inflation could become more persistent. But by keeping rates higher for longer, households and businesses face continued pressure from borrowing costs.

This does not necessarily mean the Bank is making the wrong decision. Rather, it is responding to an inflation problem that monetary policy can only partly influence.

What do higher interest rates mean for households?

The impact on households is already being felt through borrowing and living costs.

Mortgage rates remain higher than many households expected, particularly for those refinancing fixed-rate deals. Borrowing costs across the wider economy also remain elevated.

At the same time, energy costs remain volatile and food prices are sensitive to global shocks. This means households can face higher living costs while also paying more to borrow.

Lower-income households can be particularly affected because they typically spend a larger share of their income on essentials.

What happens next?

Interest rates are unlikely to fall significantly unless:

• Global energy prices stabilise
• Geopolitical risks ease
• Inflation returns closer to target

Until then, households should expect:

• Mortgage costs to remain relatively high
• Borrowing to stay expensive
• Financial pressure to persist

The bottom line

Interest rates would normally be falling in the current economic environment. The fact that they are not reflects the growing importance of global forces in shaping domestic outcomes.

Events far beyond the UK, particularly in the global energy market, are now directly influencing inflation, interest rates, and household finances.

For now, the expected relief from lower borrowing costs remains on hold.

Dr Sercan Demiralay, Principal Lecturer in Finance, Nottingham Business School, Nottingham Trent University

Dr Giray Gozgor, Associate Professor of Economics/Finance, School of Management, University of Bradford