The ongoing conflict in the Middle East, particularly the hostilities involving Iran, is beginning to cast a long shadow over the UK economy, affecting everything from fuel prices to mortgage rates. As the situation develops, the financial implications for households are becoming increasingly pronounced. The sustainability of these effects will largely depend on the duration of the conflict and the speed at which supply chains and economies can stabilise.
Rising Fuel Costs
Motorists across the UK have already felt the sting of escalating fuel prices. As of last Friday, the average price of petrol reached 150.11p per litre, marking a significant increase of 17.3p since the onset of the conflict. Diesel, too, saw a sharp rise, climbing 35.3p to 177.68p per litre, according to the RAC. This surge has sparked a contentious debate between petrol retailers and government officials, with retailers accusing the government of employing “inflammatory language” regarding alleged profiteering due to the spike in oil prices.
Economic analysts suggest that for every $10 increase in oil prices, petrol costs rise by approximately 7p per litre. Crude oil prices have fluctuated dramatically since the conflict erupted, responding to both the military situation and statements from the White House. While motoring organisations assert that fuel supplies remain adequate, they are urging drivers to limit non-essential trips and adjust their driving habits to conserve fuel.
The ripple effect of rising fuel prices extends beyond the petrol pump. Increased transportation costs inevitably translate to higher prices for goods and services. For example, supermarkets may pass on elevated transport costs to consumers, resulting in pricier grocery bills.
Mortgage Rates Under Pressure
Prior to the outbreak of hostilities, there was optimism surrounding a gradual decline in interest rates for both new fixed-rate and variable-rate mortgages. Unfortunately, the conflict has altered this trajectory dramatically. Lenders have raised mortgage rates in response to their own rising funding costs, with the expectation that the base borrowing rate will not decrease as initially predicted.
The average two-year fixed mortgage rate has surged from 4.83% at the beginning of March to 5.75% currently, marking its highest point since the previous March. Similarly, the average five-year fixed rate has climbed from 4.95% to 5.69%, reaching levels not seen since July 2024. During periods of economic uncertainty, lenders often withdraw mortgage products from the market, limiting consumer choice. Currently, there are 1,620 fewer residential mortgage products available, although over 6,000 options remain.
Adam French, head of consumer finance at Moneyfacts, notes that when lenders withdraw products rather than merely adjusting prices, it often signals that funding costs have escalated too rapidly for minor adjustments to suffice.
Energy Bills and Heating Oil Prices
Household energy bills, while currently capped by Ofgem’s regulations in England, Wales, and Scotland, remain vulnerable to fluctuations in the wholesale energy market. The price cap, applicable to variable rate deals, is set to last until July and offers limited protection. Experts warn that sustained high wholesale energy prices could lead to significant increases in household energy costs over the summer months.
Cornwall Insight’s latest projections indicate that, under the current price cap, a typical dual-fuel household may see annual energy bills rise to £1,934, up from £1,641. These predictions are, however, speculative and subject to change. In previous spikes, such as those following the Covid pandemic and Russia’s invasion of Ukraine, government intervention was necessary through the Energy Price Guarantee (EPG). While the Chancellor has hinted at potential support for vulnerable households, this assistance is expected to be more targeted than the previous universal measures.
In rural areas and Northern Ireland, where heating oil is a common energy source, there are no price caps in place, leaving consumers directly exposed to market fluctuations. Prime Minister Sir Keir Starmer has announced a £53 million support scheme for vulnerable heating oil users, to be distributed by devolved authorities.
Inflation Predictions and Economic Uncertainties
As 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, according to the Office for Budget Responsibility (OBR). However, with the onset of the conflict, analysts now expect inflation rates to rise, complicating forecasts.
The Bank of England’s primary tool for controlling inflation is interest rates. Following a recent meeting, Governor Andrew Bailey suggested the potential for further rate cuts, but many analysts now anticipate a rate increase instead. While borrowing costs may rise, the situation could provide slightly better returns for savers as uncertainty leads to a tendency to accumulate savings. Nonetheless, as the cost of living continues to climb, the purchasing power of these savings could diminish, potentially hindering overall economic growth.
The Broader Economic Landscape
The broader financial ramifications of the conflict hinge heavily on its evolution and global repercussions. The choice of holiday destinations may become more limited this spring and summer, as rising jet fuel prices are likely to drive up the cost of flights. Airlines, while employing purchasing strategies to mitigate fuel price effects, may ultimately pass on these costs to consumers through higher fares or reduced flight availability.
Why it Matters
The ongoing conflict in Iran poses a significant threat to the UK economy, with rising costs impacting nearly every aspect of daily life. As households grapple with escalating fuel prices, soaring mortgage rates, and unpredictable energy bills, the potential for increased financial strain becomes ever more pronounced. The government’s ability to cushion vulnerable populations from these shocks will be crucial in determining the overall economic resilience of the UK in the face of geopolitical turmoil.
