Have a go at this teaching activity, which includes a downloadable worksheet and suggested answers

Interest rates may fall as inflation slows.

The Bank of England base interest rate is currently 3.75%, follwing a cut from 4% in December 2025.

The base rate is the rate at which the Bank lends money to high street banks, and influences the interest rates high street banks offer on mortgages, loans and savings accounts.

The base rate is a key tool for controlling inflation (the rate at which prices rise across the economy). Its target is to keep inflation at around 2%.

When prices rise too quickly, the Bank typically increases interest rates to encourage people to borrow and spend less. This reduces demand and helps slow price rises.

The main measure of inflation, the Consumer Prices Index (CPI), had fallen to 3% in January 2026.

The Bank's governor, signalled that further rate reductions might follow during the year.

However, the situation has become considerably less predictable following conflict involving the United States, Israel and Iran. Any escalation in the Middle East risks pushing up global oil prices, which would in turn increase petrol costs and add to inflationary pressure in the UK.

If inflation rises as a result, the Bank of England may be forced to slow the pace of rate cuts, or even increase rates to bring prices back under control.