For businesses already dealing with rising costs and economic uncertainty, understanding how these changes could affect borrowing, cash flow and financial planning is becoming increasingly important. Our Director, Steve Collings, takes a look in his latest blog below.
How do interest rates affect inflation and economic growth?
The Bank of England uses interest rates as one of its main tools for controlling inflation, with the aim of keeping inflation below its 2% target.
Inflation stood at 3.3% in March, meaning prices are still rising faster than the Bank would like. When inflation remains high, increasing interest rates can help reduce spending and demand across the economy, which in turn can help slow price rises.
However, higher interest rates can also slow economic growth. Businesses may reduce investment, consumers may spend less, and borrowing becomes more expensive. With growth already under pressure due to ongoing global uncertainty, further rate rises could place additional strain on both businesses and households.
Earlier in 2026, inflation had appeared to be easing. However, disruption to oil supplies linked to the Middle East conflict has increased energy prices and renewed concerns about inflationary pressures returning.
For now, the Bank of England appears to be taking a cautious ‘wait and see’ approach while it monitors how energy prices feed through into the wider economy.
The three possible interest rate scenarios outlined by the Bank of England
The MPC’s latest report sets out three possible scenarios for energy prices and inflation over the coming months.
Scenario A – a short-term rise in energy prices
Under Scenario A, oil prices rise to around $108 per barrel during 2026 before falling back below $80 by early 2027. Gas prices follow a similar pattern.
- In this scenario, the wider impact on inflation is limited because wage increases and the prices of other goods and services do not rise significantly in response.
- This would likely reduce the need for substantial increases in interest rates.
Scenario B – inflation remains elevated for longer
Scenario B assumes energy prices rise in a similar way initially but take longer to return to normal levels.
- This would result in a more prolonged period of inflation, although the impact is still considered relatively modest.
- Andrew Bailey, Governor of the Bank of England, has indicated that he believes this is currently the most likely scenario.
- If this proves correct, businesses and households may continue to face elevated borrowing costs for longer than previously expected.
Scenario C – prolonged high energy prices and further interest rate rises
Scenario C is considered the most severe outcome. Under this model, energy prices remain high for an extended period and inflation rises above 6% by early 2027.
- The modelling suggests this could require multiple interest rate rises, potentially pushing the base rate to around 5.25% in order to bring inflation back under control more quickly.
- However, the MPC has also acknowledged that such increases could have a significant impact on economic growth and wider financial stability.
- There also remains the possibility that geopolitical tensions ease more quickly than expected, energy prices stabilise and inflationary pressures reduce without the need for further rate rises.
Why borrowing costs are already increasing
Although the Bank of England has not yet increased the official base rate, lenders have already started adjusting their pricing based on expectations of what may happen later in 2026.
Fixed-rate mortgage products and borrowing costs have increased in recent weeks, with some homebuyers finding previously agreed mortgage offers are no longer affordable.
Businesses are also seeing the impact through increased borrowing costs, tighter lending conditions and growing uncertainty around future financing arrangements.
For many businesses, this makes cash flow forecasting and financial planning even more important over the coming months.
Reviewing borrowing arrangements, assessing exposure to interest rate changes and understanding the potential impact on profitability can all help businesses prepare for a range of possible outcomes.
Why are fuel prices still rising in 2026?
Alongside the Bank of England’s report, the Competition and Markets Authority (CMA) has also published its latest monitoring report on fuel prices.
The CMA found that the recent rise in fuel prices has largely been driven by higher oil prices rather than excessive profiteering by fuel retailers.
According to the report, average fuel margins remained relatively stable between February and March 2026 and were broadly consistent with margins seen throughout 2025.
However, the CMA has identified some retailers whose margins increased and has confirmed that further investigation will take place as part of its next report.
The CMA also noted that fuel margins remain historically high overall, which may reflect a lack of sufficient competition within the market.
What is the Fuel Finder scheme and how could it help motorists?
The CMA has recently introduced the Fuel Finder scheme, designed to help motorists compare fuel prices more easily and encourage greater competition between retailers.
The scheme aims to make it simpler for drivers to find lower fuel prices locally, with the CMA estimating that motorists could save up to £9 per tank by shopping around.
Sarah Cardell, Chief Executive at the CMA, commented that the lack of significant increases in retailer fuel margins suggests the CMA’s increased scrutiny is having an effect.
She added that the CMA would continue monitoring the market closely to ensure falling wholesale costs are passed on to consumers quickly.
LWA can help businesses to prepare for possible interest rate changes
While it remains unclear exactly how interest rates and inflation will develop during the rest of 2026, the current economic uncertainty highlights the importance of forward planning.
Businesses should continue reviewing cash flow forecasts, financing arrangements and overall financial resilience to help prepare for a range of possible scenarios.
For households, rising borrowing costs and fuel prices may also place additional pressure on budgets over the coming months.
If you would like support reviewing your financial position, forecasting cash flow or understanding how interest rate changes could affect your business, our team at LWA would be happy to help.
Call us on 0161 905 1801 in our South Manchester office or 01925 830 830 for our Warrington branch, or you can email your query to mail@lwaltd.com with ‘cashflow advice needed’ in the subject header.