UK interest rates explained: why aren’t they falling despite easing inflation and what does it mean for households?
Despite slower economic growth and signs that inflation is easing, UK interest rates remain high. In this economic explainer, finance experts Dr Sercan Demiralay, Nottingham Trent University, and Dr Giray Gozgor, University of Bradford, explain why the Bank of England hasn’t yet cut interest rates, how geopolitical tensions, energy prices and supply driven inflation are shaping interest rate decisions, and what this means for households, businesses and the wider UK economy.
By Dr Sercan Demiralay and Dr Giray Gozgor | Published on 11 May 2026
Categories: Press office; Research; Nottingham Business School;
What you need to know
- UK interest rates have not fallen as expected despite weaker growth and easing inflation, because the Bank of England is worried inflation could rise again rather than stay under control.
- The main reason lies outside the UK, with global geopolitical tensions - especially in the Middle East - pushing up energy prices such as oil and gas.
- Higher energy prices drive “supply‑driven inflation”, increasing transport, food and household energy costs, which interest rates cannot easily fix.
- Cutting interest rates too soon could risk triggering further price rises, through higher wages and business costs feeding into a second wave of inflation.
- Households face a “double squeeze”, where cost of living remains high while mortgage and borrowing costs stay elevated, hitting lower‑income families hardest.
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.
What type of inflation are we facing?
This distinction is crucial.
Demand-driven inflation comes from strong economic activity and can be managed by raising interest rates.
Supply-driven inflation, however, is caused by rising costs, such as energy prices or supply chain disruptions.
The current situation is largely supply-driven. Interest rates cannot increase oil supply or reduce geopolitical risk. They can only reduce demand.
Why can’t the Bank of England cut interest rates anyway?
Because doing so risks reigniting inflation.
Policymakers are concerned about so-called “second-round effects”, where higher energy costs lead to wage increases and broader price rises. If this happens, inflation could remain elevated for longer.
This creates a difficult trade-off:
- Cut rates too early → inflation may rise again
- Hold rates → households remain under pressure
As a result, the Bank is holding rates steady despite weak growth.
Why do higher interest rates matter for UK households?
The impact on households is already being felt in the cost of living.
Mortgage rates remain higher than many expected, especially for households refinancing fixed-rate deals. Borrowing costs across the economy also remain elevated.
At the same time:
- Energy costs are volatile
- Food prices remain sensitive to global shocks
This creates a “double squeeze”. Living costs remain high while borrowing costs fail to fall.
Lower-income households are particularly affected, as they spend a larger share of their income on essentials.
Why does this situation feel unusual?
Because the UK economy is caught between two opposing forces.
Global shocks are pushing prices upward, while domestic policy is restraining demand. Instead of balancing each other, these forces are reinforcing economic pressure.
This raises the risk of a stagflation-like environment, in which inflation remains elevated while growth remains weak.
Is the Bank of England making the wrong decision not to cut interest rates?
Not necessarily.
The Bank of England is facing a genuine policy constraint. Interest rates are designed to manage domestic demand, not to respond to global supply shocks.
In this case, monetary policy is being used to respond to inflation that it cannot directly control. Cutting rates prematurely could damage credibility and worsen inflation expectations.
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