How High Will Interest Rates Go? The Case for One Last Rise

The question of how high will interest rates go now shapes mortgage bills, business investment and the political mood in the UK. The BBC’s economics editor, Faisal Islam, takes a clear position: one more rise in borrowing costs looks likely, and then the tightening ends. This article tests that claim. It separates what the data establishes from what is judgment, and it asks what a peak would and would not mean for households.

Two caveats apply. A forecast of ‘one more rise, then a pause‘ is a prediction, not a fact, and it can be overturned by a single inflation release. And a peak in the Bank Rate is not a return to cheap money. It is the point at which the cost of borrowing stops rising, not the point at which it falls.

What the Economics Editor Is Actually Arguing

Islam’s argument rests on a distinction that is often lost in headlines. Asking whether rates will rise again is different from asking where they will settle. His view, as summarised, is that the Bank of England still has work to do but is close to the end of it. That is a claim about the marginal decision, not a prediction of a sharp reversal.

It is also a claim about institutional behaviour. The Bank’s Monetary Policy Committee is not trying to hit a particular interest rate. It is trying to return inflation to its 2% target, a regime known as inflation targeting. The Bank Rate is only the tool. A forecast of the peak is therefore really a forecast of how persistent inflation will prove to be.

Background: From Emergency Lows to a Tightening Cycle

For much of the period after the 2008 financial crisis, and again during the pandemic, the Bank Rate sat at historic lows. It was cut to 0.1% in March 2020. The current cycle began in December 2021, and by August 2023 the Bank had raised rates 14 consecutive times, taking Bank Rate to 5.25%, according to the Bank of England’s published Bank Rate history. This was the fastest tightening in decades.

The trigger was a surge in inflation driven by energy prices, supply-chain disruption and a tight labour market. The Office for National Statistics recorded the annual consumer price index rate peaking at 11.1% in October 2022. The UK was not alone. The Federal Reserve and the European Central Bank were tightening in parallel, which limited the room for any single central bank to hold back.

Why ‘One More Rise’ Is a Coherent Forecast

The logic behind a final increase has three parts. Each is plausible, and each can be challenged.

Headline Inflation Is Falling, but Core Inflation Is Slower

Headline inflation fell mainly because energy prices stopped rising and base effects worked through. That is the easy part. The harder part is core inflation, which strips out volatile food and energy. Services prices in particular tend to follow wages, and they do not respond quickly to falling commodity prices. Policymakers watch these components closely because they indicate whether price rises have become embedded in the economy.

The Labour Market Sets the Floor

Strong pay growth is the main argument for further tightening. If wages keep rising faster than productivity, firms pass on costs and inflation lingers, a dynamic economists describe through the Phillips curve. A final rate rise is, in this reading, insurance against second-round effects. The opposing view holds that the labour market has already loosened enough, and that further increases risk punishing the economy for inflation that is already fading.

Policy Works With a Lag

The third element is timing. The monetary transmission mechanism is slow. The Bank itself has said that the full effect of a rate change can take around two years to feed through. Many households are still on fixed-rate deals that have not yet repriced. That argues for caution: a large part of the tightening already delivered has not yet reached the real economy. It is the strongest reason to expect a pause after one more move rather than a series of them.

The Bank of England Interest Rate Forecast: Where the Case Is Weakest

A Bank of England interest rate forecast of this kind has real weaknesses, and a critic should name them.

• Forecast error. Central banks and independent forecasters underestimated how persistent inflation would be in 2021 and 2022. Confident calls about a peak deserve scepticism for that reason alone.
• Data dependence. The Bank states that its decisions depend on incoming data. A hot services-inflation or wage release can turn ‘one more’ into several more.
• Market pricing. Financial markets move ahead of the Bank. Expectations that rates will stay higher for longer can tighten conditions even without a formal rise, through pricing in gilts and the shape of the yield curve.
• Balance-sheet policy. Quantitative tightening adds restraint independently of Bank Rate, so the headline rate understates the total policy stance.

There is also an asymmetry in the risks. Raising rates once too often is costly but reversible. Stopping too early risks entrenched inflation, which is harder to dislodge and would eventually need larger increases. That asymmetry helps explain why committees tend to lean towards one more move than forecasters expect.

What Happens to Mortgage Rates When Interest Rates Peak

Households care less about the Bank Rate than about their own bills, and the link between the two is looser than it appears. Fixed-rate mortgage pricing follows market expectations of future rates, mainly through swap rates, rather than the current Bank Rate. Lenders often reprice before the Bank acts and may ease before it cuts.

That has three practical consequences:

1. A peak does not reduce payments immediately. Anyone remortgaging from a low fixed rate still faces a step up, even if the Bank Rate has stopped rising.
2. The pain is staggered. Because fixed deals expire at different times, the effect on household budgets spreads over several years instead of arriving in one shock.
3. Savers and borrowers diverge. Higher rates raise returns on cash while squeezing borrowers. Which group a household falls into depends on its age, assets and debts, a distributional effect that headline forecasts rarely capture.

Practical Steps for Households and Businesses

A forecast is only useful if it changes decisions. A sensible response to this one avoids betting on the exact peak.

For Households

• Check when your fixed term ends and begin comparing deals several months ahead. Most lenders allow early product switches.
• Stress-test your budget against a rate 1 to 2 percentage points above today’s quotes, not only today’s.
• Weigh a longer fix against a shorter one. A short fix is a bet that rates fall soon; a long fix is insurance against being wrong.
• Do not wait for the ‘perfect’ moment. Nobody times the peak reliably, including professional forecasters.

For Businesses

• Review floating-rate debt and covenant headroom, since interest cover is usually the first constraint to bind.
• Assess the investment hurdle rate. Projects that cleared the bar at 1% may not at 5%.
• Plan for ‘higher for longer’ as the base case, with falling rates as an upside scenario.

Monitor the same indicators the Bank does: monthly CPI and its services component, wage growth, and the MPC’s voting split and forward guidance language. A divided vote often signals the direction of the next move before the decision itself.

The Macroeconomic Risks Behind the Peak

The cost of getting the peak wrong is not symmetrical across the economy. Raising rates too far raises the risk of a recession, with rising unemployment and weaker business investment. Stopping too early leaves open the opposite danger, a prolonged period of weak growth and sticky prices that economists call stagflation. The Bank is trying to steer between the two with imperfect data and long lags, so no forecast, including the one examined here, should be treated as settled.

Frequently Asked Questions

How high will interest rates go?

Nobody knows. The view from the BBC’s economics editor is that one further increase is likely and that tightening then ends. That is a forecast. The actual path depends on inflation, wage growth and global conditions.

When will interest rates stop rising?

When the Bank judges that inflation is on track to return to 2% without further tightening. In practice, that means evidence of falling services inflation and slowing pay growth, not just lower headline inflation.

Will interest rates fall after they peak?

Not immediately. Central banks typically hold rates at a peak for some time to confirm that inflation is receding. Cuts depend on sustained progress, and market expectations can move mortgage pricing before any official change.

Does a peak in the Bank Rate mean lower mortgage payments?

Not directly. Fixed-rate mortgages follow market expectations of future rates, and those remortgaging from older, cheaper deals will often still see payments rise even after the peak.

The Question That Outlasts the Peak

The sharpest insight in the ‘one more rise’ argument is that the peak matters less than the plateau. If the Bank Rate stops rising but stays elevated, the real test begins afterwards: whether households, firms and public finances can absorb borrowing costs that remain well above the pre-2021 norm. The long lags mean much of the adjustment is still ahead, however the next decision goes.

Watch three things. First, services inflation and wage settlements, because they decide whether the pause is credible. Second, the MPC’s voting split, because dissent usually foreshadows the next move. Third, the repricing of fixed-rate mortgages, because it will determine when the political and economic pain peaks, which may not coincide with the Bank Rate peak. The unanswered question is whether the 2% target can be restored without a recession. A reasonable prediction is that the answer will be uncomfortable for borrowers and uneven across the country, and that the headline rate will be a poor guide to who bears the cost.