Market Update - October 2026
The latest commentary on the UK economy, mortgage and savings markets.
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Joseph Thompson
Market Update October 2026
INFLATIONARY PRESSURES GROW BUT BANK RATE ON HOLD FOR NOW
- MPC votes to hold rates at 3.75% but Governor gives strong signal they might increase.
- Mortgage lending activity drops in August as uncertainty and rising mortgage costs weigh.
- Savings market competition remains intense, but balance growth is limited.
INFLATIONARY PRESSURES GROW BUT BANK RATE ON HOLD FOR NOW
- The MPC held Bank Rate at 3.75% in September, with three of the nine members of the committee voting for a 25-basis point rise. The minutes to the meeting show the Governor voted to keep rates unchanged but warned that ‘policy may have to tighten’ if the conflict in the Middle East persists, which appears to be the case. Since the MPC last met there have been significant developments in energy markets, with spot prices now closer to those in the Bank’s adverse scenario. With little sign of de-escalation of the conflict, MPC members are now placing more weight on energy prices staying higher for longer. Household inflation expectations remain elevated, and there is now a greater risk of second round inflationary effects especially in the run up to the wage setting period at the end of the year.
- However, there is little evidence of any second round effects in wage and price setting at present. In fact, wage growth has moderated over the year, and the latest flash estimate using ONS / HMRC Pay As You Earn Real Time Information (RTI) shows that wages grew by 3.5% in August, down from 4.4% in July. Job vacancies also fell by 8,000 in the three months to August to 702,000—the lowest level since February to April 2021.
- The UK’s weak domestic labour market conditions and lacklustre growth outlook will provide cushioning against the emergence of any second round inflationary effects. And so, while policy rates have increased across many of the G20 economies in recent months, including the euro area and the United States, the UK economy is in a different position. In fact, since the last MPC meeting the OECD have said that UK monetary policy is already in restrictive territory, and inflation will fall to 2.6% next year. If energy prices moderate in 2027 no further tightening will be required, allowing for a 25-basis point cut next year.
OECD Policy interest rate projections in the major economies
- However, markets are still pricing in a rate rise, and two rate rises are now expected within six months compared to just over one rate rise before the last MPC meeting in early September.
- Swap and mortgage rates have increased accordingly. This demonstrates how monetary conditions have already tightened without the Bank needing to raise rates. This reflects heightened inflation expectations and the market’s response to central bank rhetoric and communications. Given there is still little evidence of second round effects, this current tightening may generate the required effect without the need to tighten monetary policy.
- Unsecured lending to households continues to grow, and in August the annual growth of credit card lending was 13.3%, up from 12.6% in July and the highest since October 2005. Interest rates on credit cards have also risen, putting additional pressure on household finances, and may result in additional defaults. It is unclear if households will continue to lean on unsecured credit to maintain living standards or begin to reign in on spending as cost of living pressures endure.
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.
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