How rate expectations have changed and what it means for your money

Before the Iran conflict began, the market expectation was that rates would gently ease in 2026. But those assumptions have been thrown out of the water since the beginning of March.

What’s now expected by the market and what does this shift in the trajectory of rates mean for your money?

How much have expectations for rate hikes moved?

The chart shows the implied interest rate based on movements in relevant parts of the financial market, including futures contracts and money market pricing. This implied rate was trending lower over the last 12 months before the US-Israeli strikes on Iran were launched on 28 February – settling at around the 3.5% mark.

Now the implied rate is above the actual Bank of England base rate of 3.75%, with the implication being that the Bank of England is more likely to hike rather than cut rates. The Bank kept rates on hold at its latest meeting on 19 March but as the inflationary impacts of rising energy prices become more apparent, the chance that rates will go up at next meeting on 30 April increases. However, it’s worth noting that interest rate expectations change rapidly. Especially with a conflict that is shifting rapidly, this picture could change by the time of the next meeting.  

Mortgages and borrowing

Nearly 1,500 mortgage products have been withdrawn from the market since the start of March according to Moneyfacts. And since the start of the month, the average two-year and five-year fixed rates have gone from 4.84% and 4.96%to 5.43% and 5.45% respectively.  

For someone with a £200,000 mortgage and 25 years remaining on their term, this equates to an extra £69 per month on a two-year fix.

The average cost of borrowing on a credit card had already hit its highest levels since Moneyfacts’ records began in 2006 in February 2026 and the costs on this and on other types of loan are likely to move higher still.

Savings, annuities and investments

Higher interest rates are typically bad news for stock markets because they increase the relative appeal of perceived lower-risk options like cash and bonds. But it’s not a uniform effect on stock markets. While increasing interest rates tend to hurt market sectors like housebuilders others, like healthcare, often manage positive performance. Learn more about how higher interest rates could impact your investments.

Savings rates are beginning to increase and are likely to continue on this path but typically go up more slowly than borrowing costs. The rates on annuities, a retirement product paying a guaranteed income for life in exchange for a lump sum, also look set to go up.    

Government borrowing

Another impact of rising interest rates is it increases the cost of government borrowing – reflected in rising gilt yields. These recently hit 5% for the first time since 2008.

According to estimates from the Office for Budget Responsibility released in March 2025, a one percentage point increase in gilt rates, say from 3.5% to 4.5% for example, which persisted over a five-year period, would add £12 billion to debt interest payments. 

An increase in the cost of servicing debts could lead to pressure on government spending and potential increases in taxation as it looks to balance the books.