The ongoing conflict between the US and Israel against Iran is already having notable effects on the financial landscape in the UK. From rising fuel prices to increased mortgage rates, consumers are facing a myriad of challenges. The extent of these impacts will depend on the duration of the conflict and how quickly global supply chains can recover. Here’s a closer look at the sectors most likely to be affected.
Surge in Fuel Prices
Motorists have begun to feel the pinch, with petrol prices climbing significantly. As of last Friday, the average price per litre of petrol reached 150.11p, marking an increase of 17.3p since the outbreak of hostilities. Diesel prices have spiked even more dramatically, rising by 35.3p to 177.68p, according to the RAC. This surge has led to tension between petrol retailers and the government, as accusations of profiteering surface amidst rising costs.
Analysts point out that a $10 increase in oil prices typically results in about a 7p rise at the pump. While current supplies remain stable, industry experts are advising consumers to limit unnecessary travel and adopt fuel-efficient driving practices to mitigate costs. However, the ripple effect of these fuel price hikes is likely to extend beyond just motorists. Increased transportation costs could translate into higher prices for goods and services, particularly food.
Mortgage Rates on the Rise
Before the onset of the conflict, there was optimism regarding a decline in interest rates for fixed and variable mortgages. Unfortunately, the current economic climate has reversed that trend. Lenders have swiftly raised their rates, responding to increased funding costs and a less favourable outlook for base borrowing rates.
The average rate for a two-year fixed mortgage has surged from 4.83% in early March to 5.75%—the highest level seen since last March. Similarly, five-year fixed rates have climbed from 4.95% to 5.69%. In a climate of uncertainty, lenders are pulling mortgage products from the market, resulting in a reduced number of available options. Currently, there are about 1,620 fewer residential mortgage products available, although over 6,000 still remain on offer.
According to Adam French, head of consumer finance at Moneyfacts, when lenders withdraw products instead of merely adjusting prices, it often signals that funding costs are rising too rapidly for adjustments to keep pace.
Energy Costs and Heating Oil
Household energy bills are somewhat shielded by the price cap enforced by Ofgem, applicable in England, Wales, and Scotland. However, this cap is temporary and does not cover all consumers. The maximum price per energy unit for those on variable deals is set to remain until July, with expectations of a decrease in April.
What happens in the wholesale energy market in the coming months will critically influence bills moving forward. If high wholesale costs persist, millions could see steep increases in their energy expenses. A recent forecast from Cornwall Insight suggests that a typical dual-fuel household could see their annual bill jump from £1,641 to £1,934 by July. This forecast is not set in stone, however, and could change based on market conditions.
Additionally, the situation is dire for those reliant on heating oil, a common necessity in rural areas and Northern Ireland, where prices are unregulated. Prime Minister Sir Keir Starmer has announced a £53 million support package for vulnerable heating oil users, with funds to be distributed through local authorities.
The Broader Economic Picture
As we entered March, UK inflation was projected to hover around the Bank of England’s target of 2% for the next five years, according to the Office for Budget Responsibility (OBR). However, with the recent conflict, analysts are now expecting inflation to rise. Though a return to the peak inflation rate of 11.1% seen in October 2022 is not anticipated, economic conditions are fluid, making precise forecasting challenging.
Interest rates, which the Bank of England uses as a tool against inflation, are also under scrutiny. Following a recent meeting, the Bank opted to maintain the current rate at 3.75%, adopting a cautious, wait-and-see strategy. Many analysts now speculate that the next move may be an increase rather than a decrease.
While borrowing costs may rise, savings rates might become slightly more attractive. Nevertheless, as the cost of living continues to climb, the real value of savings could diminish, impacting overall economic growth.
Why it Matters
The unfolding situation in Iran, coupled with its global repercussions, presents significant financial challenges for everyday consumers in the UK. From the pump to the mortgage market, rising costs threaten to strain household budgets. While government support may help mitigate some effects, the long-term implications of this conflict could reshape economic stability and consumer behaviour in the UK for some time to come. Understanding these dynamics is essential for navigating the current financial landscape, making informed decisions, and preparing for what lies ahead.
