The escalating conflict in the Middle East, though only days old, is already casting a long shadow over the UK economy, with experts warning it could force the Bank of England to reverse its recent course of interest rate cuts. Soaring energy prices triggered by the geopolitical crisis threaten to fuel inflation, potentially prompting the central bank to raise borrowing costs once more, with direct consequences for household finances, mortgages, and savings accounts.
Interest Rates: A Sudden Reversal in Outlook
Throughout 2025, the Bank of England implemented four successive interest rate cuts, reducing the main rate from a peak of 5.25 percent to the current 3.75 percent. This provided significant relief for mortgage holders through cheaper borrowing costs. Financial markets had anticipated further reductions, with some analysts predicting up to three additional cuts in 2026, potentially lowering the base rate to 3 percent—a level last seen in December 2022.
However, the geopolitical landscape has shifted dramatically. The outbreak of conflict has sent oil and gas prices skyrocketing, reintroducing inflation as a major threat to economic stability. In response, many analysts have swiftly revised their forecasts, now suggesting that interest rates are more likely to rise than fall in the coming months. The Bank's Monetary Policy Committee, which meets on 19 March, was previously expected to consider another cut but may now opt for a pause or even an increase.
Mortgage Market: Early Signs of Strain
The potential ripple effects are already being felt in the housing market. Rising energy costs typically translate into higher prices for food, goods, and fuel. If sustained, this inflationary pressure could lead the Bank of England to hike interest rates, which would directly increase the cost of new mortgage deals.
"Mortgage rates eased dramatically in 2025, helped by six interest rate cuts since August 2024, but the outlook today is very different from just a week ago," said Alice Haine, a finance analyst at Bestinvest. "Shifting interest rate expectations are already filtering through to the market, with some major lenders announcing increases to their fixed-rate products in response to the crisis."
Data from Moneyfacts indicates that average two- and five-year fixed mortgage deals have already edged higher this week. While current adjustments are marginal—often adding just 0.1 to 0.25 percent to rates—they mark a stark reversal from the consistent declines witnessed in recent months. Mortgage products typically adjust in line with swap rates, financial contracts that anticipate future movements in the Bank's base rate.
"Energy prices have risen sharply since the outbreak of the conflict because oil markets are highly sensitive to geopolitical tensions in the Gulf region," Ms Haine explained. "Any prolonged disruption to the supply of oil and gas poses a significant risk to the global economy and the outlook for inflation."
This comes at a delicate time for the UK housing market. After a challenging year, there had been signs of recovery, buoyed by falling mortgage rates and increased activity among first-time buyers. Halifax's house price index reported a 0.3 percent rise in February, bringing the average property price to just over £301,000. A renewed spike in mortgage costs could jeopardise this fragile progress, which is considered vital for broader economic growth.
Despite the uncertainty, some remain cautiously optimistic. Tom Bill, head of UK residential research at Knight Frank, noted, "The market was pricing in two cuts this year and it's now pricing in one, but I still think we'll get three." He cited a weak labour market and the previous downward trend in wider inflation as reasons for his outlook, adding that for markets to price in multiple cuts again, energy prices would need to fall and economic data would have to return to the softer trends seen earlier this year.
Savings: A Potential Silver Lining
On the flip side of household finances, higher interest rates could offer a benefit to savers. When the Bank of England raises rates, banks often increase the returns offered on savings accounts. For some time, the best easy-access rate on the market has been 4.5 percent with Chase. Already this week, there are indications that other providers, including some cash ISA accounts, are beginning to raise their rates to remain competitive.
While it is not yet certain that the Bank will implement an immediate rate hike, a decision to hold rates in March now appears increasingly likely. This would allow more time to assess the economic impact of the conflict, with the April meeting providing a clearer picture.
"The UK's sluggish economy, coupled with rising unemployment rates, increased speculation that the Bank of England might go as far as delivering three cuts over the coming year, but a March cut now looks extremely unlikely," said Danni Hewson of AJ Bell. "The satnav which had been guiding us forwards now seems to be on the fritz."
With the ISA deadline of 5 April approaching, savers are reminded to maximise their tax-free allowances and seek out the best possible returns for their money, taking advantage of any upward movements in savings rates while they can.
