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The ongoing conflict in the Middle East, particularly the war involving Iran, is already exerting pressure on household budgets across the UK. From rising fuel prices to increased mortgage rates, the economic fallout is becoming increasingly evident. How deeply this turmoil will affect finances depends largely on the war’s duration and the resilience of global supply chains.
Fuel Prices on the Rise
Motorists have likely noticed a significant uptick in fuel prices recently. As of Friday, the average cost for petrol soared to 150.11p per litre, representing an increase of 17.3p since the onset of hostilities. Diesel, too, has seen a sharp rise, now averaging 177.68p per litre, a jump of 35.3p, according to the RAC. The situation has sparked disputes between fuel retailers and the government, with accusations of the latter using “inflammatory language” over potential profiteering.
Market analysts suggest that for every $10 increase in crude oil prices, petrol prices can rise by approximately 7p per litre. As crude prices remain volatile, fluctuating in response to developments in the conflict and statements from the United States, motoring organisations urge drivers to limit non-essential travel and adopt more fuel-efficient driving habits.
Although not everyone relies on a car, the ripple effect of rising petrol prices can lead to higher costs for goods and services. Transport expenses for supermarkets, for instance, may translate into increased food prices.
Mortgage Rates and Housing Choices
Before the conflict began, there had been optimism around a decline in interest rates for fixed and variable mortgages. However, the situation has dramatically shifted. Lenders are responding to rising funding costs and the expectation that the base borrowing rate will remain elevated, leading to rapid increases in mortgage rates.
According to Moneyfacts, the average two-year fixed mortgage rate has surged from 4.83% in early March to 5.75% today, marking the highest level since last March. For five-year deals, the average rate has climbed from 4.95% to 5.69%. In times of uncertainty, lenders often withdraw mortgage products, leading to fewer options for consumers. Currently, there are 1,620 fewer residential mortgage products on the market, although over 6,000 deals still remain available.
Adam French, head of consumer finance at Moneyfacts, noted that when lenders withdraw deals, it often indicates that funding costs have escalated too quickly for gradual adjustments.
Energy Bills Face Uncertainty
While households in England, Wales, and Scotland benefit from a price cap on gas and electricity bills set by Ofgem, this cap has its limitations. It is temporary and does not cover all customers. The cap is currently in place until July, with prices expected to decrease in April. However, the future of household energy bills hinges on the wholesale energy market in the coming months. A sustained period of high wholesale prices could lead to steep increases in energy costs for millions.
Cornwall Insight, an energy consultancy, projects that under Ofgem’s price cap for July to September, a typical dual-fuel household could see its annual bill rise to £1,934 from £1,641. This forecast remains speculative and could shift dramatically. In previous crises, such as those following Covid and Russia’s invasion of Ukraine, government interventions like the Energy Price Guarantee were necessary to assist consumers. The Chancellor has indicated that targeted support may be available, although it would not be as widespread as the previous schemes.
For those relying on heating oil, particularly in rural areas and Northern Ireland, the situation is even more precarious as there are no price caps to protect them from soaring costs. Recently, Prime Minister Sir Keir Starmer announced a £53 million support package for vulnerable users of heating oil, which will be distributed through devolved authorities.
The Bigger Picture: Cost of Living and Inflation
At the beginning of March, UK inflation was predicted to align closely with the Bank of England’s target of 2% over the next five years. However, with the onset of the conflict, analysts are now revising these projections. The Office for Budget Responsibility had previously forecasted a 2.3% increase in the price of a typical basket of goods for this year, but the war has introduced new uncertainties.
Despite the chaotic situation, experts anticipate that inflation is unlikely to hit the peak of 11.1% recorded in October 2022. Factors such as the war in Ukraine contributed to food price spikes, but the current circumstances differ.
Interest Rates: A Shift in Expectations
The Bank of England’s mandate is to maintain inflation as close to 2% as possible, primarily through adjustments in interest rates. In February, there was a glimmer of hope for rate cuts, but by March, the committee opted to maintain the Bank rate at 3.75%, signalling a cautious approach. Many analysts now expect that the next move may be an increase, rather than a decrease, in interest rates.
For those with savings, this could mean slightly better returns; however, the rising cost of living may erode the purchasing power of these savings, potentially stunting economic growth.
Why it Matters
The unfolding conflict in Iran is not just a geopolitical issue; it has tangible implications for everyday finances in the UK. Rising fuel prices, escalating mortgage rates, and uncertain energy bills are all part of a broader economic landscape that is becoming increasingly fraught. As households brace for the potential long-term effects of this conflict, understanding these dynamics is crucial for effective financial planning. The situation underscores the interconnectedness of global events and local economic realities, reminding us that international conflicts can directly impact our daily lives and financial well-being.
