• Bank Rate held at 3.75% in July, with three of nine MPC members voting for a rise.

• Economic growth flatlines as households face higher cost of living pressures.

• Mortgage market activity remains muted but stable as economic concerns weigh on confidence.

• Households save less and borrow more to support living standards in 2026.

HOUSEHOLDS FACE RENEWED COST OF LIVING PRESSURE AS UK ECONOMY FLATLINES

1. UK economic growth remains weak with just 0.1% growth estimated in May 2026 following a fall of 0.1% in April. Around 60% of UK GDP is generated by household spending and households are under ongoing financial pressures due to higher energy prices and interest rates. Mortgage rates have edged upwards since the outbreak of the Middle East conflict and in the Bank’s Financial Stability Report (FSR) for July, they now project that 5 million households will see their mortgage repayments increase by the end of 2028. This is up from nearly 4 million in the December 2025 report.

2. The FSR also shows that households will be spending more of their income on debt repayment. Households’ debt servicing ratio (DSR) was broadly flat at the end of 2025 at 7.5%, but this is forecast to rise to 8.0% by the end of 2028 in a scenario of persistently higher energy prices. Yet this is still significantly below the 2008 financial crisis peak. When DSRs are ‘Cost of Living Adjusted’ to include essential spending on food and energy etc. (COLA DSR), the percentage of post-tax spending increases to 15%. This is a higher rate compared to the last decade, but still lower than previous peaks. It would take a severe scenario (see chart below) for COLA DSRs to return to these levels. Overall, this suggests that household debt servicing is likely to remain manageable in aggregate – although it does coincide with a weakening labour market.

Debt servicing ratios. Scenario C = persistently higher energy costs plus an additional 300 basis point increase in borrowing costs

3. However, some households will struggle to repay debt alongside essential spending. The percentage of those with high COLA DSRs (at over 70%) increased slightly to 1.6% in Q1 2026 and is projected to increase to 1.8% if faced with persistently higher energy prices. This group is likely to cut back sharply on spending, potentially amplifying the economic downturn. Lower income households, including renters, are also disproportionately affected as they spend a larger share of their income on essentials, limiting their ability to adjust spending in response to higher prices. In a recent Bank survey, 30% of this group said they experienced financial difficulty. However, this group typically holds a smaller share of outstanding mortgage and consumer debt, which limits the impact on financial stability.

4. Whilst mortgage arrears and possessions remain low and stable, strains are appearing in the unsecured lending market. Firstly, households are borrowing more unsecured credit. The annual growth of credit card lending was 12.5% in June 2026, up from 12.2% in May, and the highest since January 2024. This likely reflects households looking to support living standards when facing a higher cost of living. Defaults on these loans appear to be rising according to the latest Credit Conditions Survey. Lenders reported that default rates for total unsecured lending increased ‘a lot’ in Q2 2026 with a net score of 37.4 and were expected to increase further in Q3. This score is the highest since the financial crisis in Q3 2009 (40.5).

5. There was a welcome fall in annual CPI inflation in June as it fell to 2.6%, down from 2.8% in May. The CPI services annual rate also eased to 3.6%. The fall in the headline rate was driven by reductions in the two most salient categories for consumers: transport and food & non-alcoholic beverages. However, inflation is still expected to pick up later in the year, especially after the renewed tensions in the Middle East, with oil prices rising back over $100 a barrel — the highest price for over two months. In the Bank’s central scenario published in the July Monetary Policy Report, inflation is expected to average 3.2% by Q4 2026 before easing to an average of 2.7% in 2027. Much of the pickup is expected to be driven by food prices. Oil prices are expected to decline to around $71 per barrel by the end of 2028 and only moderate second-round inflationary effects emerge. However, in the Bank’s adverse scenario, where ongoing tensions in the Middle East keep energy prices high, inflation could reach as high as 4.5% in 2027, driven by much higher second-round effects as shown in the chart below.

6. UK labour market conditions remain loose. The unemployment rate was 4.9% in the three months to May, unchanged from the previous three months. However, job vacancies have also been falling, with 712,000 vacancies in April to June, which is 7,000 fewer than in the previous three months. This puts the vacancies to unemployment ratio below its estimated equilibrium. Annual regular pay growth fell to 3.4% in the three months to May, down from 3.6% in the previous three months. Much of this weakness comes from private sector pay, whereas public sector pay growth remained robust at 5.5% in the three months to May and up from 5.2% in the previous three months. 

6. Intelligence from Bank of England agents suggests AI adoption is gradually reducing demand for highly automatable jobs. Respondents to the Bank’s survey of business decision makers said they expected AI to reduce employment by around 0.4% per year and to boost productivity by around 0.9% per year over the next three years. However, 90% of respondents reported no material impact of AI on their business over the past three years.

7. As highlighted in previous Market Update papers the OIS curve is a useful instrument to gauge market expectations for Bank Rate. Since the conflict in the Middle East the short end of the curve began to slope upwards. In a recent paper, Bank staff explain how the upward slope was mainly driven by risk premia rather than by a central expectation that Bank Rate would be raised during the year.  This reflects the compensation investors require given the uncertain outlook for the scale and duration of the war. The latest OIS curve prices in a 25-basis point rise by December 2026, and a further 25 basis point rise to 4.25% by June next year (blue line in chart). This is a significant shift upwards compared to one month ago (pink line) but has moderated since the MPC announcement on 30 July (burgundy line) where Bank Rate was held at 3.75%.

At this meeting six MPC members voted to maintain rates and three voting for a rate rise. For the majority, holding Bank Rate, combined with the tightening of financial markets since the outbreak of the Middle East conflict, was providing a sufficient buffer against the upside risks to inflation. This would also allow time to observe further evidence, with the option to increase Bank Rate in the future if necessary. The remaining three members believed that a proactive increase in Bank Rate would reduce the probability of second-round effects setting in. Even if second-round effects were weaker than expected, this group deem it less costly correcting monetary policy than not taking proactive action.

BSA members and associated can download the full market update which includes further analysis of the mortgage and savings markets and a range of charts.