The US and Israel’s military strikes on Iran, and subsequent retaliation, have disrupted energy markets, throwing expected base rate cuts into doubt and making it crucial for brokers to prepare clients for “volatility”.
Over the weekend, the US and Israel launched military strikes on Iran, with the latter retaliating with air and missile attacks on Qatar, the UAE, Saudi Arabia, Bahrain and Kuwait.
This has led to oil and gas prices rising, increasing inflation expectations and decreasing the likelihood of two expected interest rate cuts due to heightened energy costs.
The interest rate trajectory impacts swap rates, which dictate mortgage pricing, with experts saying that the number of base rate cuts could be revised due to ongoing instability, thus slowing the downward momentum of mortgage pricing.
Laura Suter, director of personal finance at AJ Bell, said that if the conflict continued to push oil prices higher, then that “feeds through into higher petrol and energy costs here in the UK”.
She said households were “shielded in the short term” by the energy price cap, but “sustained rises” would push up inflation, which would make “life much trickier for the Bank of England”.
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Suter explained: “Until recently, markets were fairly confident we’d see two interest rate cuts this year, with the next move pencilled in for March. But expectations have already cooled as oil price forecasts rise, with some predicting it could hit $100 a barrel. The Bank of England had been modelling oil at $71 a barrel, so a sustained spike would materially change the picture.
“A rate cut when the Monetary Policy Committee meets on 19 March is no longer a near-certainty; it’s now looking much more like 50:50. For mortgage borrowers, that matters. Lenders price fixed rate deals on expectations for future interest rates, so if markets think the bank will cut rates more slowly – or not as far – swap rates stay higher, and so do mortgage deals. In other words, hopes of steadily falling mortgage rates could be delayed.”
She added that there was also a “currency angle” as the pound has slipped against the dollar, which is usually seen as a safe haven in times of geopolitical stress.
“A weaker pound makes imports, including energy, more expensive, adding to inflationary pressure. If disruption in the Strait of Hormuz pushes up shipping costs, that only compounds the issue.
“That said, we’re not in the same territory as the spike that followed Russia’s invasion of Ukraine. Organisation of the Petroleum Exporting Countries (OPEC) is increasing output, which should help temper prices, and much depends on how long the conflict lasts. A short-lived flare-up may barely register in mortgage pricing, but a prolonged shock to energy markets is a different story.
“For now, the impact on UK mortgage rates is more about nudging expectations than triggering a sharp reversal. But for borrowers hoping for rapid relief this year, the path down just got a little less certain,” Suter said.
Arielle Ingrassia, associate director and investment specialist at Evelyn Partners, said energy prices were the key.
She continued: “If higher energy prices persist, progress on disinflation could stall. That would keep swap rates elevated as markets push out the timing of Bank of England rate cuts. A spring cut had looked plausible, but pricing now reflects a lower probability of near-term easing.”
However, if the energy supply “remains broadly intact and oil stabilises”, inflation expectations could ease, allowing swap rates and mortgage pricing to settle.
But if the supply disruption was more “prolonged”, meaning oil prices were high, that could “delay rate cuts further and keep fixed mortgage pricing under pressure”.
“The near-term outlook has shifted towards fewer and later cuts, with energy markets the key variable from here,” Ingrassia said.
Advisers should tell customers that ‘volatility is back in the system’
Karen Noye, mortgage expert at Quilter, said it was “clear how quickly sentiment has shifted since the Iran escalation”.
She said: “Markets have pulled back from the idea of a steady run of rate cuts this year, and that has taken some of the downward pressure off mortgage pricing. The move has been driven less by domestic data and more by the possibility that higher energy prices could keep inflation stickier for longer.
“There is no suggestion of an imminent spike in mortgage rates, but the path lower now looks less assured than it did. Lenders remain active and well-funded, yet without a clear line of sight on rate cuts, they are likely to be more cautious about repricing aggressively.”
Noye said that for advisers, the message to clients was that “volatility is back in the system”.
“Anyone with a product expiring soon may want to engage earlier, not because rates are guaranteed to rise, but because the window for securing current pricing could shift quickly if markets continue to question whether the remaining cuts will materialise. Equally, this is still a fast-moving geopolitical situation and expectations could settle again if energy prices calm.
“The broader takeaway is that advisers should be preparing clients for a more uneven rate environment through 2026. The long-term direction is still towards lower borrowing costs, but the journey may be bumpier than many hoped even at the end of last week,” she added.