How Missile Strikes in Iran Are Disrupting UK Mortgages and Inflation
Missile attacks on an Iranian oil field are triggering a chain reaction that’s shaking the UK economy in unexpected ways. From farmers rationing red diesel to homeowners suddenly seeing their mortgage offers withdrawn, the ripple effects of this conflict stretch far beyond the Middle East.
Despite the UK not importing a single molecule of Iranian gas, the speed and scale of these economic tremors have stunned experts. With over 25 years covering inflation control, I find this shockwave’s intensity unprecedented.
Fresh from an exclusive interview with the Bank of England governor, the message is clear: the war has upended economic forecasts. Contrary to pre-conflict expectations, the Bank held interest rates steady this week, signaling inflation will not retreat to the 2% target anytime soon.
Inflation Surges Amid Rising Oil and Gas Prices
The Bank’s economists now warn inflation could climb to 3.5% in the coming months based on Wednesday’s spikes in oil and gas prices. If Thursday’s price surge sustains, inflation could soar even higher. Markets reacted violently to the Bank’s decision to pause rate cuts, with long-term UK government bond yields jumping sharply. Investors are betting on two or three interest rate hikes this year, though the Bank cautions this may be premature.
This energy price shock has derailed promising economic trends seen as recently as Thursday morning’s jobs report. What looked like an imminent turn toward easing interest rates and falling inflation has suddenly reversed course.
Bank of England Signals Readiness to Act
In my conversation with the governor, he emphasized caution. “Markets are getting ahead of themselves assuming multiple rate rises,” he said. “Today we’ve given a very clear message. The right place to be is on hold.”
The Bank will monitor the conflict’s impact “carefully and continuously.” While inflation will climb as higher gas prices feed through to households—especially in July—the governor insisted this is not a replay of the 2022 energy crisis triggered by Russia’s invasion of Ukraine.
“The context is very different. I don’t expect inflation to spike in the same way,” he said, noting interest rates already sit higher than in 2022 and the inflation shock now is expected to be less severe than the double-digit surge four years ago.
Waiting on Global Events to Shape UK Policy
Describing the Bank’s stance as “wait and see” barely captures the uncertainty. Monetary policy cannot fix Qatar’s gas output or unblock the Strait of Hormuz, critical chokepoints influencing global energy prices. The Bank must watch closely over the next six weeks before its next policy meeting at April’s end.
In just three weeks, the conflict has:
- Upended expectations of an interest rate cut
- Sent inflation trajectories off course
- Raised effective government borrowing costs
- Triggered a fundamental repricing of fixed-rate mortgages
- Shaken parts of the UK housing market
Unsurprisingly, both the governor and the Chancellor are urging for de-escalation to stabilize the economy.
Key Economic Concerns:
- Inflation: Rising energy costs push inflation higher than forecast
- UK Economy: Growth prospects dim amid uncertainty
- Cost of Living: Households brace for increased expenses
