The ongoing conflict between the US, Israel, and Iran is already exerting a noticeable influence on the financial landscape in the UK. From escalating petrol prices to rising mortgage rates, the war is reshaping economic forecasts and consumer behaviour. The extent of these changes will largely depend on the conflict’s duration and the global economy’s resilience in recovering from its fallout.
Fuel Prices Surge Amidst Conflict
Motorists across the UK have felt the immediate sting of rising fuel prices, with average petrol costs reaching 150.11p per litre—an increase of 17.3p since the onset of hostilities. Diesel prices have similarly escalated, now averaging 177.68p, up by 35.3p, as reported by the RAC motoring organisation. This surge has sparked tensions between petrol retailers and the government, with accusations of profiteering following the jump in oil prices.
Analysts estimate that for every $10 increase in oil prices, UK pump prices rise by approximately 7p per litre. Despite assurances from motoring organisations that supply remains adequate, they are advising consumers to limit unnecessary journeys and adopt more fuel-efficient driving habits. The broader implications of these petrol price hikes extend beyond the pumps, potentially leading to increased costs for goods and services, particularly in the food sector, where transportation costs are a critical factor.
Mortgage Rates on the Rise
Before the conflict began, there was cautious optimism regarding falling interest rates for fixed-rate mortgages. However, the current landscape has shifted dramatically. Lenders are now increasing rates swiftly in response to their own rising funding costs and the anticipated stability of the base borrowing rate. The average two-year fixed mortgage rate has climbed to 5.75%, up from 4.83% in March, marking its highest level since last year. Similarly, five-year deals have risen from 4.95% to 5.69%.
This turbulence is causing lenders to withdraw mortgage products from the market, subsequently reducing consumer choice. According to financial information service Moneyfacts, there are now 1,620 fewer residential mortgage products available, although a selection of over 6,000 remains. Adam French, head of consumer finance at Moneyfacts, suggests that such actions often signal that funding costs have escalated beyond what can be managed through mere price adjustments.
Energy Bills and Heating Oil Costs Under Pressure
Households in England, Wales, and Scotland benefit from a price cap on gas and electricity bills, set by the energy regulator Ofgem. However, this cap is temporary and does not extend to all consumers. While current prices are projected to decrease in April, the future of household energy bills remains uncertain. A sustained spike in wholesale energy prices could lead to significant increases for millions of consumers by the summer.
Energy consultancy Cornwall Insight forecasts that a typical dual-fuel household could see its annual bill rise from £1,641 to approximately £1,934 under Ofgem’s price cap for July to September. This precarious situation mirrors the earlier spikes in energy costs seen during the Covid-19 pandemic and the war in Ukraine. Chancellor’s statements suggest possible targeted government support, but this would not be as universally applied as previous measures like the Energy Price Guarantee.
Rural households relying on heating oil—particularly in Northern Ireland—face an even more challenging situation. Without a price cap, they are particularly vulnerable to fluctuating costs, prompting Prime Minister Sir Keir Starmer to announce £53 million in support for low-income users of heating oil, to be distributed through local councils.
Inflation and Interest Rates: A Complex Outlook
In early March, the Office for Budget Responsibility (OBR) projected UK inflation to align closely with the Bank of England’s target of 2% over the next five years. However, the escalation of the Iran conflict has complicated these forecasts. Analysts now contend that inflation is likely to rise, although they do not anticipate a return to the peak of 11.1% recorded in October 2022. The inflationary pressures are compounded by rising costs in essential commodities, although the nature of the current conflict differs from previous crises.
The Bank of England, tasked with controlling inflation, may soon face pressure to raise interest rates instead of continuing with cuts. Following a recent committee meeting, the bank maintained its rate at 3.75%, but analysts expect that further increases are on the horizon. Higher borrowing costs could dampen consumer spending, while the tendency to save during uncertain times may limit economic growth.
Why it Matters
The unfolding situation in Iran is not merely a distant geopolitical issue; it has tangible implications for households across the UK. Rising fuel prices, escalating mortgage rates, and uncertain energy costs create a perfect storm that threatens to exacerbate the already challenging cost of living crisis. As consumers grapple with these financial pressures, the broader economic landscape may also shift, influencing everything from household budgets to national growth trajectories. The resilience of the UK economy in navigating these turbulent waters will be closely watched, with the potential for long-lasting effects on financial stability and consumer confidence.
