What could higher interest rates mean for markets and your money?

The Bank of England and US Federal Reserve are primed to make their latest decisions on interest rates, with expectations for a short-term move higher building.

If the outlook for central banks’ rate policies was a game of football, commentators would describe 2026 as a game of two halves.

At the beginning of the year, the narrative was a broad-based easing of inflation across major economies, laying the ground for central banks to cut rates through the course of the year.

The US-Iran war and consequent closing of the Strait of Hormuz have pushed energy prices up sharply since February, feeding into inflation and turned a potential easing cycle into a mixed picture for interest rates.

While the Bank of England and the Federal Reserve have so far held off hiking interest rates, the European Central Bank and the Bank of Japan both raised rates in June.

Market implied prices suggest a more than 50-50 chance that the US Federal Reserve and Bank of England will hike rates before the end of the year. The market is pricing in a 60% chance of a US rate hike this month.

A stronger than expected August US non-farm payrolls report on 4 September which showed the economy added 162,000 jobs while unemployment remained stable at 4.1%, helped buoy expectations.

What do rate hikes mean for bond markets?

A key feature of bond markets this year has been rising of yields for bonds with longer dated maturities.

The US 10-year yield recently touched 4,8%, its highest level since 2023, while UK-10-year yields reached 5.3%, (highest since 2008) Germany’s 10-year bunds approached 3.4% and Japan’s 10-year bond yields crossed 3% for the first time in three decades.

In most cases government bond yields, even for debt with shorter maturities, have already moved higher ahead of central banks hiking rates themselves and this has fed into a higher cost of borrowing for both consumers and businesses.

What do higher yields mean for stock markets?

So far stock markets have taken European stock markets are trading within a few percentage points of all-time highs.

• Read: Bond yields are rising again – here’s why investors should care

However, underneath the surface Bloomberg notes US forward earnings multiples on a blended 12-month basis have shrunk from 23 times in October 2025 to 19.4 times, suggesting higher bond yields are having an impact on markets.

It is worth noting that any sign of stress from higher bond yields is likely is likely to surface first in smaller indebted companies as higher interest expenses take a larger bite out of earnings.

What is the impact on mortgages and house prices?

Higher gilt yields have increased borrowing costs for banks which has resulted in higher UK mortgage rates, dampening demand and slowing housing market activity.

Two-year gilt yields have increased by 0.8% since the start of the US-Iran war to sit above 4.5%. According to Moneyfacts, the average five-year fix rate mortgage is 5.68% and the two-year fix rate is 5.63% (both as of 7 September).

An increase in rates from the Bank of England would be likely to nudge mortgage rates yet higher, although there won’t be a direct link unless the borrower has a tracker mortgage.

The latest report from Lloyds House Price Index (formerly the Halifax House Price Index) showed house prices falling for the first time since 2023, with average house prices dropping 0.4% year-on-year to £298,468.

Mortgage approvals have dropped to their lowest level since the beginning of 2024 and fewer properties are changing hands.