Soaring oil and gas prices triggered by the Middle East conflict are igniting an economic crisis that is squeezing household budgets across the UK. The benchmark Brent crude oil price has surged to around $110 a barrel, nearly 50% higher than the pre-war level of $72. Meanwhile, wholesale gas prices have skyrocketed to 150p per unit, almost double the 77p recorded just three weeks ago.
Inflation Set to Surge Beyond Expectations
These staggering energy costs have disrupted inflation forecasts dramatically. Thomas Pugh, Chief Economist at RSM, warns that inflation, once projected to fall to 2% by year-end, could now climb as high as 5%. This inflationary pressure intensifies the risk of additional interest rate hikes as policymakers scramble to contain rising prices.
Bank of England Faces Tough Decisions on Interest Rates
City traders have shifted their outlook sharply. Previously confident that borrowing costs would ease this year, market sentiment now anticipates multiple rate hikes. Before the Bank of England’s recent decision to hold the base rate at 3.75%, traders assigned a 3% probability to an interest rate increase, signaling growing uncertainty.
With the energy price cap expected to rise in June, driven by elevated wholesale costs, traders have priced in three potential interest rate hikes in 2026 — in June, July, and December. Should these materialize, the base rate could reach 4.5% by year-end, a stark contrast to earlier forecasts predicting a fall to 3.25%.
April’s Rate Meeting on a Knife-Edge
Data from the London Stock Exchange Group reveals a razor-thin split ahead of the April Bank of England meeting: a 51% chance of no change versus a 49% chance of a rate cut. However, some analysts, including those at Pantheon Macroeconomics, argue that if oil prices stabilize below $125 per barrel, the Bank may have sufficient leeway to maintain current rates.
Consumers Already Feeling the Pinch
Regardless of future decisions, consumers are already grappling with the fallout. Mortgage rates hit their highest levels in nearly a year, putting additional strain on household finances. The average two-year fixed mortgage rate climbed from 4.83% at March’s start to 5.3% recently, marking the highest level since April 2025. Similarly, five-year fixed rates surged from 4.95% to 5.35%, the highest since August 2024, according to Moneyfacts.
Monetary Policy Committee Warns of Inflation Risks
The Bank of England’s Monetary Policy Committee acknowledges the economic shock from the Middle East conflict: “The conflict has caused a significant rise in global energy and commodity prices, directly impacting households’ fuel and utility bills and indirectly affecting business costs. As a result, CPI inflation will be elevated in the near term.”
