The sharp rise in oil and gas prices as a result of the war in Iran has set off an economic chain reaction that is already hitting people’s wallets.
Benchmark Brent crude oil remains above $110 a barrel, compared with about $72 before the war.
And a unit of wholesale gas is now at 150p – almost double the 77p per unit just three weeks ago.
As a result, it is believed that inflation – which was projected to fall to 2% by the end of the year – may in fact now reach 5%, according to Thomas Pugh, chief economist at accounting firm RSM.
While city traders believe that there may be three more increases in interest rates later this year.
Money Blog: Bank of England says it is ‘ready to act’ on Iran war
increase in interest rates
And as these forecasts are increasing, the possibility of interest hike is also increasing.
The consensus at the end of February was that borrowing costs would fall this year – the focus of discussion was only on how much and when.
But today, before the Bank of England announced keeping the base interest rate at 3.75%, a debate broke out among traders.
Now they were not thinking whether there would be a cut, nor whether the rates would remain the same. Instead, there was a 3% chance of an increase.
The same traders have now raised the price in June, although this may come as soon as next month, when the energy price range is expected to rise due to increases in wholesale energy costs.
The Bank of England’s April meeting of interest rate setters is now on a knife’s edge, with a 51% chance of no change and a 49% chance of a cut, according to London Stock Exchange Group (LSEG) data.
At the moment, traders believe three hikes are likely in 2026, in June, July and December.
If they are passed, the interest rate will be brought down to 4.5% by the end of the year.
This is a sharp contrast to where we were at the beginning of the month. At the time, the interest rate was thought to fall to 3.25% before the end of 2026.
However, not everyone agrees. Provided that oil prices do not rise further, and remain below $125 a barrel, economic research firm Pantheon Macroeconomics believes the bank has enough room to leave its base interest rate unchanged.
The effects are already here
Even if none of this comes to pass, these higher rates are likely already impacting those looking to re-mortgage.
Average mortgage rates are at their highest level in years.
The typical two-year fixed mortgage rate reached its highest level since April 2025: rising from 4.83% at the beginning of the month to 5.3% on Thursday, according to financial information company MoneyFacts.
The average five-year fixed deal has not been this high since August 2024, rising to 5.35% from 4.95% in early March.
“The conflict in the Middle East has caused significant increases in global energy and other commodity prices, which will impact fuel and utility prices for households and have indirect effects through costs for businesses,” the Monetary Policy Committee said.
“New shocks to the economy will result in higher CPI inflation in the near term.”
