The ongoing hostilities between Iran and Israel are beginning to reverberate through the UK economy, influencing everything from fuel prices to mortgage rates. As the conflict escalates, financial experts suggest that its duration and the resilience of global supply chains will significantly shape the economic landscape. Below, we explore the key areas likely to be affected by these geopolitical tensions.
Fuel Prices Surge Amidst Geopolitical Tensions
Motorists across the UK are already feeling the financial strain as fuel prices escalate. As of Friday, average petrol prices soared to an 18-month peak of 140.6 pence per litre, reflecting an increase of almost 8 pence since the onset of the conflict. Diesel prices have seen an even steeper rise, surging nearly 17 pence to reach 159.2 pence per litre, according to the RAC.
This spike in fuel costs has sparked a contentious exchange between petrol retailers and the government, with retailers accusing officials of using “inflammatory language” to suggest that companies are exploiting the situation to increase profits. Analysts note that for every $10 increment in oil prices, petrol costs can rise by approximately 7 pence per litre. Given the current volatility in crude oil prices, which fluctuate alongside developments in the conflict, the prospect of reaching average petrol prices of 150 pence per litre is increasingly plausible.
While supply chains remain intact for the moment, industry experts advise consumers to limit non-essential travel and adopt more fuel-efficient driving habits to mitigate costs. However, it is important to note that rising petrol prices could have wider implications, as increased transport costs are likely to be passed on to consumers in the form of higher prices for goods and services, particularly food.
Mortgage Rates on the Rise
In the realm of housing finance, the conflict has disrupted the previously anticipated downward trend in mortgage rates. Major lenders have begun to increase rates in response to escalating funding costs and a shift in expectations regarding the base borrowing rate. As of Friday, the average rate for a two-year fixed mortgage climbed to 5.10%, up from 4.84% in early March, marking the highest level since July. Similarly, five-year fixed mortgages rose from 4.96% to 5.19% during the same period.
The current climate of economic uncertainty has led lenders to withdraw over 500 mortgage products from the market, further narrowing consumer choices. Adam French, head of consumer finance at Moneyfacts, highlighted that such drastic moves typically indicate that funding costs have escalated too rapidly for lenders to adjust their offerings incrementally.
With fewer products available, potential homeowners and those looking to remortgage may find themselves facing higher costs at a time when financial planning is already strained.
Energy Bills and Heating Oil Prices
Although the UK has implemented a price cap on gas and electricity bills through Ofgem, the protections are limited and time-sensitive. The cap on variable energy deals will remain in place until July; however, fluctuations in the wholesale energy market could dramatically impact household bills in the coming months. A sustained period of high wholesale prices could necessitate significant increases in energy costs for millions.
The last notable surge in energy prices, following the COVID-19 pandemic and Russia’s invasion of Ukraine, prompted government intervention through the Energy Price Guarantee. Energy Secretary Ed Miliband has stated that the government is prepared to intervene again if necessary, though the extent of that intervention will depend on the conflict’s broader economic ramifications.
For those reliant on heating oil—particularly in rural areas and Northern Ireland—the situation is even more precarious. Prices have reportedly more than doubled since the conflict began, exacerbated by panic buying and limited supply. Chancellor Rachel Reeves has announced a forthcoming support package for households struggling with these rising costs, with details expected soon. The Competition and Markets Authority is also investigating to ensure fair treatment for consumers in this volatile market.
The Broader Economic Landscape
As of early March, the Office for Budget Responsibility projected UK inflation to hover around the Bank of England’s target of 2% over the next five years. However, these forecasts were made prior to the escalation of hostilities in Iran, and analysts now believe that achieving such stability may be increasingly unlikely. The unpredictable nature of the conflict complicates inflation estimations, though experts do not anticipate a return to the peak inflation rate of 11.1% witnessed in October 2022.
Interest rate cuts, which had seemed feasible, are now under reconsideration. The Bank of England’s recent meetings have signalled a shift in sentiment, with many analysts now doubting that any reductions in borrowing costs will occur in the near future. Increased borrowing costs may deter spending and further hinder economic growth, even as higher interest rates could benefit savers in the long term.
Why it Matters
The ramifications of the Iran conflict extend far beyond immediate geopolitical concerns; they are poised to impact the everyday lives of UK citizens in significant ways. Rising fuel and energy costs will strain household budgets, while increased mortgage rates could stifle aspirations for homeownership. As the situation develops, the interconnectedness of global supply chains and financial markets will continue to shape the economic outlook, making it imperative for consumers and policymakers alike to remain vigilant and proactive in navigating this complex landscape.
