London Daily

Focus on the big picture.
Thursday, May 28, 2026

It's clear the Bank of England thinks we are at - or near to - a peak in interest rates

It's clear the Bank of England thinks we are at - or near to - a peak in interest rates

Alongside its interest rate decision today - another half percentage point increase which takes the cost of borrowing to 4% - the Bank of England introduced some subtle shifts in its language.
Back in the Soviet era, analysts would spend hours trying to read between the lines of the speeches and comments coming out of the Kremlin.

Was there a hint buried in this or that paragraph about nuclear policy and the path of the Cold War?

Today, economists do much the same thing with the noises coming out of the world's central banks.

The men and women who run monetary policy and decide our interest rates tend to talk in convoluted sentences. But spend enough time analysing those words and this modern form of Kremlinology can pay dividends.

Today is one of those days, because if you read between the lines of the latest pronouncements from the Bank of England, it's clear that we are reaching (or might have already reached) the peak for UK interest rates. About time too, you might say.

Alongside its interest rate decision today - another half percentage point increase which takes the cost of borrowing to 4% - the Bank introduced some subtle shifts in its language.

Words like "forcefully" have been removed from the part of the minutes talking about future rate increases. Future tenses have been replaced with conditional tenses.

We've never seen quite such a rapid rise of borrowing costs in this country - and note that while 4% might seem low in comparison to previous eras (it was in the double digits in much of the 1970s and 1980s) the impact on households is severe.

Today's mortgage holders are significantly more burdened with debt than their parents and grandparents.

And rates are, alongside inflation, higher energy costs, a diminishing workforce and the economic friction of Brexit, part of the explanation for why the economic outlook remains so lacklustre.

Significantly less miserable than last time

The Bank's forecasts today are significantly less miserable than they were last time it looked at the economy, thanks in large part to the fact that wholesale energy prices have dropped sharply.

While the Bank still expects a technical recession (in other words, two or more successive quarterly falls in gross domestic product), this would be the shallowest recession in modern history. Better to think of it as a flatlining economy.

But flatlining is not especially good either. And the real concern from the Bank's forecast is that Britain is projected to flatline for a long time to come.

By 2026, the Bank reckons total national income may still be below where it was in 2019.

Clearly this is not good news. And while many other countries around the world are facing similar challenges to the UK - in particular higher prices - one of the great conundrums is why the UK seems to be, if not an outlier, then particularly badly affected.

Is it Brexit? Is it that our economy was particularly badly scarred by COVID? Is it the fact that we are especially sensitive to higher energy costs?

The short answer is probably all of the above. But there are no simple answers here.

The Bank's forecast today does not provide any fresh answers; but nor does it provide any fresh reassurance.
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