As we enter into a new year, it’s useful to reflect on how global interest rates changed in 2025 and consider what could lie ahead in 2026.
While inflation has retreated from its post-pandemic peaks, central banks are still being restricted by rising prices, resilient labour markets, and wider economic uncertainties.
So, what could be next for interest rates in the UK, US and Europe, and what could this mean for investors?
UK: what’s next for interest rates in 2026?
The UK ended 2025 with falling interest rates — at the latest Bank of England meeting in December, the base interest rate was cut to 3.75%.
Inflation has fallen significantly from its 2022–23 highs and is closer to target, but remains more volatile than in the US or eurozone.
Persistent services inflation and strong wage growth continue to complicate the outlook.
While the Bank of England has started to ease policy, it has done so cautiously, reflecting concern about reigniting inflation rather than a desire to stimulate growth aggressively. Compared to history, policy is still fairly restrictive.
What do the markets think?
Investors can get a sense of what stock markets are thinking by using Bloomberg’s World Interest Rate Probability (WIRP) table. It uses market prices from interest rate futures contracts to give us a real-time consensus view of where markets think rates are heading.
While it can be helpful to know a general sense of direction, the WIRP changes constantly and as it’s a view of what markets think there and then, it’s never a guarantee.
While UK rates are currently at 3.75%, markets are currently pricing in that UK interest rates will be around 3.25% by this time next year.
US: what’s next for interest rates in 2026?
In the US, interest rates have moved lower from their peak but remain clearly restrictive, with the latest December cut bringing the policy rate to a three-year low of 3.5%.
Inflation has moderated, allowing the Federal Reserve to start easing, but progress towards the 2% target has been uneven.
Economic growth has proven resilient and the labour market has cooled only gradually. As a result, the Fed has shifted away from a ‘higher for longer’ stance towards a data-dependent, gradual easing path. The Fed is still focused on preventing inflation from re-accelerating, rather than supporting weaker growth.
What do the markets think?
For the US, markets are predicting interest rates to be around 3% by the end of 2026.
Europe: what’s next for interest rates in 2026?
The eurozone is the most advanced in its cutting cycle, with interest rates now at 2%.
Weaker economic growth, softer wage pressures, and a faster fall in inflation has given the European Central Bank greater scope to cut rates earlier and more decisively.
However, economic momentum across the region remains fragile, with policy increasingly focused on supporting growth while keeping inflation expectations anchored.
What do the markets think?
In Europe, it’s not too different to where they are now as, using the WIRP, markets are expecting rates to remain around 2%.
Should investors expect more interest rate cuts in 2026?
Looking ahead to 2026, inflationary pressures might have eased over the last few years, but they haven’t disappeared.
In the US in particular, tariff-induced inflation risks, combined with lingering supply-side constraints and labour shortages, may limit how many rate cuts we see.
Even where inflation continues to ease, central banks are likely to remain cautious, balancing the desire to normalise policy against the risk of a resurgence in rising prices.
Geopolitical risks and ongoing global tensions further complicate the outlook. Trade disputes and supply chain disruptions continue to affect energy and goods prices, increasing uncertainty and reducing the disinflationary benefits of globalisation.
High levels of government and corporate debt add another constraint.
Elevated borrowing costs raise concerns about how sustainable current debt levels are and how easy it will be to service the existing debt. It means central banks will be more sensitive to things that could affect overall financial stability, not just inflation.
Together, these factors suggest that while the direction of travel for interest rates remains lower, the scope for aggressive cuts in 2026 may be limited. So it means policy will likely remain tighter than pre-pandemic norms for longer.
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