The ongoing conflict involving Iran has begun to ripple through the UK economy, affecting everything from petrol prices to mortgage rates. As the situation develops, the extent of these changes will largely depend on the duration of the hostilities and the resilience of global supply chains. Here’s a closer look at how your finances may be influenced.
Rising Petrol Prices
Motorists across the UK have likely felt the pinch at the fuel pump, with petrol prices climbing sharply since the onset of the conflict. As of last Friday, the average price of petrol soared to 144.51p per litre, marking an increase of 11.7p since the conflict began. Diesel prices have seen an even steeper rise, jumping 23.9p to 166.24p per litre, according to the RAC.
This surge has sparked a contentious debate between fuel retailers and the government, with retailers accusing officials of using “inflammatory language” while suggesting that companies are profiting from the situation. Analysts estimate that a $10 increase in oil prices typically results in a 7p rise at the pump. If the current high oil prices persist, we could see averages reaching 150p per litre in the near future.
While fuel supplies remain adequate, motoring organisations are advising drivers to limit unnecessary journeys and adopt more fuel-efficient driving habits. It’s important to note that rising fuel costs can have a domino effect, leading to increased prices for goods and services as transport expenses climb.
Mortgage Market Under Pressure
The housing market is also feeling the effects of the conflict, with many lenders raising interest rates in response to escalating funding costs. Before the war began, there were optimistic projections for declining rates on fixed and variable mortgages. However, the reality is quite different now.
Data from Moneyfacts reveals that the average two-year fixed mortgage rate has surged from 4.83% in early March to 5.35%—the highest level since last year. Similarly, the average rate for a five-year fixed mortgage has climbed to 5.39% from 4.95%. For homeowners with a £250,000 mortgage, this means an increase of approximately £788 annually.
As lenders respond to the evolving economic landscape, about 1,000 mortgage products have been withdrawn from the market, though there are still over 6,600 options available. Adam French, head of consumer finance at Moneyfacts, noted that such drastic measures often indicate that funding costs are changing rapidly, necessitating a more significant adjustment than mere price tweaks.
Impacts on Energy Costs
In terms of energy bills, households in England, Wales, and Scotland currently benefit from a price cap imposed by the energy regulator Ofgem. This cap, which lasts until July, provides some relief, but it does not cover all consumers. While prices are set to drop in April, the volatility of wholesale energy markets amid the conflict could lead to significant increases in household energy costs come summer.
Energy consultancy Cornwall Insight forecasts that a typical dual-fuel household could see annual bills rise from £1,641 to £1,973 under the July to September price cap. Although the government has previously intervened during crises, the Energy Secretary has stated that any future support would depend on the conflict’s impact and would likely be targeted at those most in need.
For those relying on heating oil, often used in rural areas, the situation is more precarious, as there is no price cap. Prime Minister Keir Starmer has announced a £53 million support package for vulnerable users of heating oil, to be distributed through local authorities.
Inflationary Pressures Loom
At the beginning of March, the UK’s inflation rate was expected to hover around the Bank of England’s target of 2% over the next five years. However, with the conflict now underway, inflation forecasts are becoming increasingly uncertain. Analysts predict that while inflation is set to rise, it is unlikely to reach the peak of 11.1% experienced in October 2022.
The Bank of England’s primary tool to combat inflation is adjusting interest rates. After a recent meeting, the governing committee decided to maintain the Bank rate at 3.75%, adopting a cautious approach. Many economists now anticipate that interest rates may increase rather than decrease, putting further strain on borrowers while potentially offering better returns for savers.
Why it Matters
The unfolding conflict in Iran poses significant challenges for UK consumers and the economy at large. Rising prices for fuel, mortgages, and energy bills are likely to compound the financial pressures already faced by households. As global economic conditions fluctuate, the ripple effects of geopolitical instability remind us that our personal finances are intricately linked to events far beyond our borders. Understanding these dynamics is vital for making informed decisions in an uncertain economic landscape.
