18 September 2026
Executive Summary
The Bank of England has warned that UK interest rates may need to rise if the Middle East conflict continues to drive inflation higher, creating a renewed financing risk for British businesses.
The Bank’s Monetary Policy Committee voted 6-3 to keep Bank Rate unchanged at 3.75% on Thursday.
But the significance lies in the change in direction of the discussion.
The Bank now expects UK inflation to rise above 4% early next year, largely because of higher energy prices.
Before the Middle East conflict, financial markets had been expecting UK interest rates to fall during 2026.
That assumption has reversed.
The Bank has also paused active sales of government bonds for six months and halted sales of long-dated gilts as it responds to pressure in the UK bond market.
The change follows a wider rise in international borrowing costs.
The US Federal Reserve raised interest rates by 0.25 percentage points this week — its first increase in more than three years — and signalled that further tightening may follow.
Businesses that built financing plans around falling interest rates should therefore reassess those assumptions.
UK Impact
The immediate Bank Rate remains unchanged.
But expectations about future borrowing costs affect businesses before the Bank itself changes rates.
Potential consequences include:
- Higher refinancing costs.
- More expensive corporate loans.
- Increased overdraft costs.
- Higher property financing costs.
- Greater pressure on leveraged businesses.
- Reduced investment.
- Higher working-capital costs.
- Increased supplier insolvency risk.
The effect can be particularly significant for businesses whose fixed-rate borrowing expires during the next 12–24 months.
A company may remain profitable operationally but experience financial pressure when existing debt has to be refinanced at materially higher rates.
Global Impact
The UK is not experiencing this change in isolation.
Higher energy prices have complicated monetary policy internationally.
Central banks face an uncomfortable combination:
- Higher energy-driven inflation.
- Slower economic growth.
- Elevated government borrowing.
- Higher bond yields.
The US Federal Reserve has already responded by raising rates.
The Bank of England has not yet followed.
But its latest communication makes clear that further tightening cannot be ruled out.
This creates an additional risk for international businesses carrying significant debt.
Our View
Businesses should stress-test financing before refinancing becomes urgent.
Companies should ask:
- When does existing debt mature?
- Which facilities have floating interest rates?
- What happens if rates rise another 0.5%?
- What happens if they rise 1%?
- Are interest-rate hedges in place?
- When do those hedges expire?
- Are financial covenants still comfortable?
- Could higher energy costs simultaneously reduce margins?
- How much working capital is required?
- Are customers paying more slowly?
- Could suppliers experience refinancing difficulties?
- Are major suppliers highly leveraged?
- Could planned capital expenditure be delayed?
- Are alternative lenders available?
- Are refinancing discussions beginning early enough?
- Does the business rely upon rates falling during its forecast period?
Businesses should particularly avoid treating falling interest rates as a certainty within financial forecasts.
Interest-rate assumptions are now themselves a material business-continuity variable.
Risk Indicator: HIGH – UK INTEREST RATES, INFLATION & REFINANCING
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The information contained within these Market Alerts is provided for general market awareness and informational purposes only. It does not constitute financial, legal, investment, regulatory or insurance advice. Whilst every effort has been made to ensure accuracy at the time of publication using multiple reputable and independently verified sources, geopolitical events, legislation, regulation and market conditions may change rapidly. Readers should obtain appropriate professional advice before acting upon any information contained herein.
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