Uncertainty surrounding the ongoing conflict in the Middle East is raising fresh concerns about inflation and interest rates in the UK economy.
At its latest meeting, the Bank of England Monetary Policy Committee (MPC) voted to keep the official interest rate at 3.75%. However, the Bank’s accompanying report outlined several possible economic scenarios for the months ahead — some of which could lead to further rate rises during 2026.
For businesses and households alike, understanding how interest rates could change remains important for financial planning and cash flow management.
Why Interest Rates Matter
The Bank of England uses interest rates to help control inflation, with a long-term target of keeping inflation below 2%.
Inflation stood at 3.3% in March 2026, which remains above target.
When inflation rises:
- Borrowing becomes more expensive
- Spending tends to slow
- Demand falls
- Price rises can begin to stabilise
However, higher interest rates can also slow economic growth by increasing costs for businesses and consumers.
The Impact of Rising Energy Prices
Earlier in 2026, inflation had appeared to be easing.
However, disruption to global oil supplies linked to conflict in the Middle East has caused energy prices to rise again, increasing concerns that inflation could climb further in the months ahead.
The Bank of England currently appears to be taking a “wait and see” approach while monitoring how energy prices feed through into the wider economy.
The Three Main Scenarios
The Bank of England outlined three possible economic scenarios in its latest report.
Scenario A: Temporary Price Spike
- Oil prices briefly rise to around $108 per barrel in 2026
- Prices then fall back below $80 by early 2027
- Inflation increases only modestly
- Limited wider impact on wages and prices
Scenario B: Longer-Lasting Inflation
- Energy prices rise similarly but take longer to fall
- Inflation remains elevated for longer
- Economic pressure builds more gradually
Andrew Bailey has suggested this is currently viewed as the most likely outcome.
Scenario C: Severe Inflation Pressure
- Energy prices rise sharply and remain high
- Inflation exceeds 6% by early 2027
- Multiple interest rate increases may be needed
- Rates could potentially rise to around 5.25%
This would likely place additional pressure on economic growth, borrowing and household finances.
Interest Rates Are Already Affecting Borrowers
Even though the official Bank rate has not yet increased further, many lenders have already raised:
- Mortgage rates
- Loan interest rates
- Fixed-rate borrowing costs
This reflects market expectations about future inflation and interest rate movements.
The housing market has already seen some effects, including:
- Mortgage offers becoming less affordable
- Buyers struggling with revised borrowing costs
- Higher renewal rates for fixed-rate mortgage deals
What Businesses Should Consider
Periods of uncertainty highlight the importance of strong financial planning.
Businesses may benefit from:
Reviewing Cash Flow Forecasts
Understanding how increased borrowing costs could affect profitability and working capital.
Stress Testing Budgets
Considering how different interest rate scenarios may impact repayments and operating costs.
Reviewing Existing Borrowing
Checking whether current loan structures and interest rates remain suitable.
Building Financial Resilience
Maintaining flexibility and cash reserves where possible.
Final Thoughts
While there is still uncertainty around inflation and interest rates, it is clear that businesses and households could face continued financial pressure during 2026.
The exact direction of interest rates will depend heavily on global energy markets and wider economic conditions over the coming months.
Planning ahead and understanding how rising borrowing costs may affect your finances can help reduce risk and improve resilience.
If you would like help forecasting cash flow, reviewing borrowing or planning for different interest rate scenarios, we would be happy to help.
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📧 info@ojwassociates.co.uk
