Only cautious cuts expected in 2026
Inflation may be easing and growth sluggish, but mortgage borrowers hoping for a rapid series of Bank of England (BoE) rate cuts in 2026 are likely to be disappointed, according to leading economists. The message from both Fitch Solutions and Oxford Economics is that Bank Rate should fall further next year – but only gradually, and with policymakers highly sensitive to upside risks on inflation.
Both forecasters expect two further 25 basis point cuts in 2026, taking Bank Rate from its current 3.75% to 3.25% by year end. However, the emphasis is firmly on the word “cautious”.
From clear downward path to a more uncertain 2026
Economist James Bennett at BMI (a Fitch Solutions Company), told Mortgage Introducer that the outlook going into 2025 was relatively straightforward: the direction for rates was clearly down.
“In 2026, the outlook for Bank Rate becomes less certain than it was in 2025,” he said. “Last year, it was unambiguous that the prevailing direction heading into the year was down with inflation significantly off its highs from 2022 and the labour market continuing to loosen, while monetary policy remained tight.”
Since then, the landscape has shifted. A series of rate cuts has brought policy closer to neutral, while the disinflation story has become less clear-cut.
“Monetary policy has been loosened notably, and is approaching neutral territory, while inflation remains above target, wage growth elevated, and the labour market appears to be stabilising,” Bennett noted.
That combination – policy less restrictive, but inflation and pay not yet fully tamed – is what underpins the more cautious tone around 2026. It is also central to how mortgage professionals should think about the path for swap rates and fixed-rate pricing next year.
A finely balanced MPC – but bias still towards cuts
The most recent BoE decision underlines that uncertainty. The Monetary Policy Committee (MPC) voted 5–4 to cut Bank Rate by 25bps to 3.75%, with four members – Megan Greene, Clare Lombardelli, Catherine Mann and Huw Pill – preferring to hold. Andrew Goodwin, Chief UK Economist at Oxford Economics, highlighted the importance of Governor Andrew Bailey’s role.
“As we expected, Governor Andrew Bailey was again the swing voter, switching to support a cut after voting to hold in November,” Goodwin said. “Bailey appeared to have been swayed by the two lower inflation readings published since the November meeting, as well as further evidence of weakness in activity and the labour market.”
For brokers and lenders, the key takeaway from the minutes is that, while the balance of risk has moved in a more dovish direction, this is not the start of an aggressive easing cycle.
Goodwin points to two main messages:
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The balance of risks has tilted dovish. The BoE’s “high inflation” scenario now looks less likely to materialise, he said, whereas the “weak demand” scenario “is still a live risk”. That creates space for further cuts – but not a free hand.
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The pace of easing will be measured. In saying that “judgements around further policy easing will become a closer call”, the committee signalled that this is unlikely to turn into a rapid series of cuts.
Part of the reason, Goodwin noted, is that “Bank Rate is getting closer to what MPC members consider to be the neutral interest rate, although the minutes made clear there’s a range of views on what that level is.” As policy approaches neutral, the incentive to move more slowly – and check that inflation is really on a sustainable path back to target – increases.
Inflation, wages and the “neutral rate” problem
Both economists emphasise the central role of wage dynamics in shaping the 2026 outlook.
Though recent inflation prints have surprised on the downside, Goodwin noted that wage and price expectations may be proving sticky. The BoE’s Decision Maker Panel suggests “wage and price expectations have plateaued,” while intelligence from the central bank’s regional agents indicates that pay deals “are likely to average 3.5% in early-2026” – a level he described as higher than would be consistent with hitting the inflation target over the medium term.
That creates a dilemma for the MPC. On one side sit the more hawkish members, who are “concerned that structural shifts in inflation expectations and price setting make it more likely inflation will remain high”. On the other side are the doves, “worried about downside risks to inflation from weaker activity”.
But even within the dovish camp there is now a split. Goodwin noted that the internal members – Bailey, Sarah Breeden and Dave Ramsden – have become “much more cautious on the scope for further cuts”, driven in large part by “forward-looking wage indicators”.
Bennett reached a similar conclusion from a slightly different angle. For him, the BoE is no longer operating in an obviously restrictive zone where cuts are a one-way bet. With policy “approaching neutral territory” and inflation not yet defeated, he says, “policymakers are likely to remain cautious in implementing further rate cuts from a current 3.75%”.
Forecasts converge: two more cuts, but timing is the key risk
Despite this caution, there is a striking degree of agreement in the headline numbers. Both Fitch Solutions and Oxford Economics expect two further 25bps cuts in 2026, taking Bank Rate to 3.25% by the end of the year.
“In this context, we feel comfortable with our projection for two further 25bps cuts to Bank Rate in 2026, to an end-year 3.25%,” Bennett said.
Oxford Economics’ call is identical. “We maintain our call that the MPC will implement two 25bp cuts in 2026, with Bank Rate ending the year at 3.25%,” Goodwin confirmed.
Where the nuance lies is in the timing – and that’s the part that matters most for mortgage pricing and client advice.
Bennett’s base case is for one cut in the spring and one in the final quarter. “In terms of timing for the rate cuts, our base case is a cut in April or June and one in Q4,” he says. “To us, the primary risk to our forecast comes in terms of timing as opposed to magnitude, with it very possible for the Bank to go earlier given some recent downside surprises in the economic data and also a disinflationary Autumn Budget.”
Goodwin broadly agrees that February is unlikely to be a key turning point. He doesn’t expect the BoE’s next forecast update to have a major bearing on that month’s decision: “Given the MPC already has a good idea of the likely impact of the Budget on the outlook for inflation and activity, we don't think the next forecast update in February will be particularly influential in the rates decision that month.”
Instead, he sees April as the more likely window: “We think the majority will be prepared to wait until the end-April meeting to cut again, by which time more evidence of sluggish growth and rising unemployment is likely to have emerged, and they will have a clearer view of the strength of 2026 pay awards.”
December’s cut: sentiment shift more than mortgage game‑changer
For the mortgage market, the BoE’s December 25bps cut has already left its mark – but in a relatively contained way.
Bennett noted that the move “has likely stimulated activity at the margin, with variable rate products and savings accounts repricing for a lower Bank Rate.” For borrowers on trackers and some reversion rates, the cut has provided modest relief, while savers have seen a slight squeeze on returns.
However, he stresses that the impact on term debt – and therefore on the bulk of mortgage lending – has been limited. “The impacts have been marginal for term debt given the outcome was already fully priced in by markets,” he explains.
Instead, the focus for markets was on the internal dynamics of the MPC. The “narrow vote split (5 vs 4) and the lack of a dovish signal from the committee” effectively capped how far and fast rate expectations could fall, Bennett says, “which prevented a more meaningful (and stimulatory) dovish repricing for rate sensitive products.”
The message, then, is clear: the big repricing in fixed mortgage rates came as markets anticipated the initial easing cycle. From here, further reductions in Bank Rate are likely to filter through more slowly and selectively, highly dependent on data flow and MPC communications.
What this means for the mortgage and housing market
Several practical implications stand out for the mortgage and housing market.
First, there is scope for modest further rate relief, but not a return to ultra‑low rates. Both economists see Bank Rate only edging down to around 3.25% by the end of 2026. That is a friendlier environment than the 5%+ levels seen at the peak, but still a far cry from the sub‑1% era. Brokers should continue to frame conversations around a “new normal” of structurally higher rates, even if the direction over the next 18 months is gently downward.
Second, volatility around MPC meetings is likely to remain a feature of the landscape. With the committee finely balanced and “judgements around further policy easing” becoming a close call, each meeting will carry a real risk of surprise. That argues for careful management of clients’ expectations and a focus on affordability buffers rather than attempts to fine‑tune the timing of deals.
Third, wage and labour market data are now central to the rate story. Both Bennett and Goodwin single out wage growth and labour market slack as key swing factors. Brokers looking to anticipate the path for rates – and thus movements in swaps and fixed‑rate pricing – should pay as much attention to pay settlements and unemployment trends as to headline CPI releases.
Finally, timing risk may matter more than the ultimate destination. The emerging consensus around an end‑2026 Bank Rate of 3.25% masks significant uncertainty about the journey. Whether the next move comes in April, June or later will influence short‑term funding costs and the relative attractiveness of different product strategies. Lenders and intermediaries will need to remain agile as the data – and the MPC’s reaction to it – evolve.
