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As the conflict between the US and Israel against Iran escalates, its repercussions are reverberating through the UK economy, affecting everything from fuel prices to mortgage rates. The extent of these financial impacts appears contingent upon the conflict’s duration and its effect on global supply chains and economic stability. In this article, we will analyse the various sectors influenced by the ongoing geopolitical tensions and offer insights into potential future trends.
Fuel Prices Surge as Tensions Escalate
Motorists in the UK are already feeling the pinch at petrol stations, with average fuel prices soaring. According to the RAC, the average price of petrol has risen to 152.8 pence per litre—an increase of 20 pence since the onset of the conflict. Diesel prices have surged even more dramatically, now averaging 182.8 pence per litre, marking a 40 pence hike since early March. This rise translates to over £100 for a full tank in a 55-litre family car, the first time costs have exceeded this threshold since December 2022.
The conflict’s impact on crude oil prices has resulted in a notable increase at the pump, with analysts indicating that every $10 uptick in oil prices typically raises petrol costs by approximately 7 pence per litre. Despite assurances from motoring organisations about the availability of fuel, they recommend that drivers limit non-essential journeys and adopt more economical driving behaviours to mitigate rising costs.
Mortgage Rates on the Rise
The war’s onset has disrupted the previously anticipated decline in mortgage interest rates. Lenders have responded to increased funding costs and a shift in expectations regarding base borrowing rates by raising their rates. The average two-year fixed mortgage rate has escalated from 4.83% in early March to 5.84%—the highest level since July 2024, as reported by Moneyfacts. Meanwhile, five-year fixed rates have also seen a jump from 4.95% to 5.76%, reaching their peak since November 2023.
In times of economic uncertainty, lenders often withdraw mortgage products, limiting consumer choices. Currently, there are approximately 1,600 fewer residential mortgage options available, although this still leaves over 6,000 products on the market. Adam French, head of consumer finance at Moneyfacts, notes that pulling deals signifies that funding costs have shifted too rapidly for minor adjustments to keep pace.
Energy Bills and Heating Oil Concerns
Domestic energy bills are somewhat insulated from immediate spikes due to the price cap enforced by Ofgem, which applies to households in England, Wales, and Scotland. However, the cap is not universally applicable and is time-limited, set to last until July. Wholesale energy prices are currently on a downward trend, but an extended period of elevated costs could lead to significant increases in household energy bills come summer.
Cornwall Insight’s predictions suggest that a typical dual-fuel household could see annual energy costs rise to £1,929, up from the current £1,641 under Ofgem’s cap. This projection is fluid and contingent upon market conditions. In the past, crises such as the COVID-19 pandemic and the Ukraine conflict prompted government interventions like the Energy Price Guarantee (EPG). Although the Chancellor has hinted at targeted support for vulnerable households, it will differ from the universal nature of the EPG.
Rural households reliant on heating oil could face the most immediate price pressures, as there is no cap to limit costs. In response, Prime Minister Sir Keir Starmer has announced a £53 million support package for the most vulnerable users, which will be distributed through devolved authorities.
Inflation and Interest Rate Dynamics
At the outset of March, inflation in the UK was projected to align closely with the Bank of England’s target of 2% over the next five years. However, the onset of military conflict has since clouded these forecasts. Current estimates indicate an upward trajectory for inflation, although analysts do not foresee a return to the peaks of 11.1% experienced in October 2022, as the current conflict lacks the significant food production disruption seen during the Ukraine crisis.
The Bank of England’s primary mandate is to maintain inflation around the 2% mark, primarily by adjusting interest rates. After a recent meeting, Governor Andrew Bailey indicated a “wait and see” approach, with many analysts predicting that rates may rise rather than fall in the near future. This shift implies a tightening of borrowing conditions, potentially curtailing consumer spending power and hindering economic growth.
Broader Economic Implications
The broader implications of the Iran conflict on personal finances are yet to fully materialise. As jet fuel prices have increased, the cost of air travel is also expected to rise, potentially limiting holiday options for consumers this spring and summer. Airlines may find it challenging to absorb these costs, leading to higher fares or reduced flight availability.
Why it Matters
The ongoing conflict in Iran stands as a pivotal moment for the UK economy, with rising fuel prices, increased mortgage rates, and uncertain energy costs all contributing to a tightening financial landscape. As consumers brace for heightened living costs, the ripple effects of geopolitical instability underscore the interconnectedness of global economies. Understanding these dynamics is essential for navigating personal financial decisions in such turbulent times, making it crucial for individuals to remain informed and adaptable in the face of change.
