The services sector expanded for a second straight month in August – but rising business costs are clouding the fixed-rate mortgage outlook
UK services growth reached a four-month high in August, with the S&P Global Services PMI rising to 52.5 from 52.1 in July. The composite reading, which includes manufacturing, matched that figure, up from 52.2 – both the highest since April. The results point to continued private-sector expansion despite the US-Iran war.
Yet the same survey found more firms reporting higher input costs and raising the prices they charge. That has an impact on mortgage pricing. When services inflation runs hot, it signals to markets that the Bank of England may need to hold or raise rates. That in turn pushes up the swap rates lenders use to price fixed-rate deals.
Following the outbreak of the US-Iran conflict, two-year swap rates rose from around 3.6% in early March to more than 4.5% by early May 2026. Average two-year fixed-rate mortgage rates rose by more than 1.1 percentage points over the same period, according to the Intermediary Mortgage Lenders Association (IMLA).
Tim Moore, economics director at S&P Global Market Intelligence, said: “August data highlighted improving operating conditions across the UK service economy. Business and consumer spending saw further gains after declining during the second quarter of 2026.”
What does UK services growth mean for the September rate decision?
The Bank has held the base rate at 3.75% since late 2025. Three Monetary Policy Committee (MPC) members – Huw Pill, Megan Greene and Catherine Mann – voted for a rise to 4% at the most recent meeting. They cited concerns that energy-driven inflation could prove stickier than hoped. Governor Andrew Bailey said inflation had fallen faster than expected, to 2.6%, but acknowledged that the conflict keeps energy prices volatile.
A Reuters poll in mid-August found almost 90% of economists expected the base rate to stay at 3.75% for the remainder of the year. Market pricing, however, had assigned a small probability to a hike by year end. As analysis of how MPC vote splits have affected lender pricing illustrates, the tone of MPC guidance often moves fixed-rate costs more than the headline decision itself.
How is UK services growth affecting fixed-rate mortgage costs?
Business optimism rose to its highest level since February 2026. Employment fell at its slowest pace since October 2025, supported by improved sales pipelines. New work growth held above 50, with the sub-index easing from 50.8 in July to 50.7. For brokers, UK services growth is running warm enough to keep the MPC cautious, and fixed-rate pricing elevated as a result.
ONS data published in late August 2026 showed mortgage interest payments were a significant contributor to higher inflation for non-retired households in the year to June. The payments added 0.14 percentage points more to inflation than for retired households. Overall household costs rose 2.8% year on year.
According to UK Finance’s Mortgage Market Forecast published in December 2025, external remortgaging is expected to rise 10% to £77 billion. With 1.8 million fixed-rate deals expiring this year, many clients will be moving onto significantly higher rates. They will need advice on their options.
The September MPC decision takes place on 17 September. Brokers should watch not just the headline outcome – widely expected to be a hold – but the vote split.
If the minority grows, swap rates are likely to reprice upward, taking fixed-rate products with them. Its vote split and guidance will shape how swap rate movements feed through to lender funding costs in the weeks that follow.
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