On 17 September, the Bank of England announced that it would maintain the Bank Rate at 3.75%. This follows speculation that rates may be eased after some of the initial inflationary pressures slowed down. However, American intervention in Iran and its consequences for the Strait of Hormuz and the oil-rich Gulf states have scuttled any chance of that.
Market pricing now suggests the Bank will instead follow the Federal Reserve, which raised rates by 25 basis points to 3.75%–4.00% on 16th September, its first increase since 2023. The Bank of England’s own instantaneous forward OIS (Overnight Index Swap), curve peaks at 4.84% around fifteen months out, having risen roughly 20 basis points at the one-year point in the first seventeen days of September alone.
How Higher Interest Rates Affect UK Deals
This might appear to spell trouble for UK dealmaking. PwC reports that UK dealmakers deployed £134.7bn in the first half of 2026, more than double the previous year, while deal volumes fell by almost 13%, with the ten largest transactions accounting for nearly two-thirds of the value. That concentration arguably reflects valuation rather than financing: with the FTSE 100 trading at a discount to European and US markets, as evidenced by foreign takeovers reaching a record share of UK M&A. A trade buyer paying with cash, shares or low-cost corporate borrowing repaid from its own profits is far less exposed, so a rate rise is unlikely to deter it in the short term. A stronger pound would narrow that discount, but only slowly.
Debt Markets Show Signs of Strain
That potential indifference does not extend to private equity buyers, known as sponsors, who depend on debt priced off sterling rates. A sponsor funds an acquisition largely with floating-rate debt repaid from the target's cash flow over a holding period of around five years. Because sponsors typically hedge much of that debt against the forward curve, their borrowing costs rise as expectations shift, before the Bank moves. Higher projected interest leaves less cash to repay debt and compresses returns at exit. Where those fall below the fund's hurdle rate, sponsors become less willing to acquire, lowering their offers or walking away.
Leveraged markets have already exhibited this sensitivity, albeit to conflict-related volatility, which will be exacerbated by the likely rise in interest rates. European leveraged debt issuance fell to €130bn in the first quarter of 2026, down almost 19% year-on-year. High-yield bond issuance fell 25.3% over the same period, while direct lending rose 39.6%, with the UK and Ireland accounting for the largest share of any European region.
City Firms Face a Shift in Work
For City firms, this suggests redistribution rather than contraction. Fewer leveraged buyouts mean fewer mandates for the private equity and leveraged finance teams that run them. The debt that does proceed will increasingly come from private credit funds, as noted by PwC, rather than syndicated loans and high-yield bonds, shifting work away from the capital markets teams that handle bond issuance. PwC notes that subdued exits have pushed private equity towards refinancing, which falls to finance teams, and reshaping portfolio companies, which draws on corporate as much as finance. Firms are likely to see less conventional buyout work and more refinancing, as sponsors manage the debt they already hold.