Homeowners are heading for higher mortgage costs as the ongoing Iran conflict means interest rates are likely to be raised to offset a predicted surge in inflation, a leading economist has warned.
Mohamed El-Erian, chief economic adviser to insurance giant Allianz, warned that the average person would face ‘higher mortgage rates’ as the Bank of England would need to keep rates higher for longer to prevent prices from soaring.
‘The Bank of England was correctly hoping that inflation would go down to 2 per cent throughout this year. We’re now looking at inflation remaining above 3 per cent. In order for investors to be compensated for that higher inflation, they will require higher interest rates,’ El-Erian told the BBC. Inflation in the UK stood at 3.3 per cent in January.
Fears of an inflation spike came after the Strait of Hormuz, a key shipping lane for oil and gas, was effectively closed off by the conflict last week causing global fuel prices to soar and sparking fears of a supply crunch.
Higher energy prices are expected to feed through into inflation, which in turn means the Bank of England will be less willing to cut interest rates.
This is because higher rates reduce spending in the economy, which means prices do not rise as fast as demand for goods is lower, bringing down inflation.
But higher rates also make loans such as mortgages more expensive to pay off, piling pressure on homeowners taking out new loans, renewing their fixed-rate deals or those with tracker mortgages where the interest changes in line with rate movements.
Interest rates have been falling since August 2024 and currently sit at 3.75 per cent. Prior to the turmoil in the Middle East they had been expected to drop further.
Mohamed El-Erian, chief economic adviser to insurance giant Allianz, warned the average person would face ‘higher mortgage rates’ due to the Iran conflict
Major lenders have already begun raising rates on mortgages
But analysts warned last week that if inflation rises as a result of the Iran conflict they could instead be increased back above 4 per cent in an attempt to prevent a repeat of October 2022 when soaring energy and food costs pushed the UK inflation rate to a 41-year high of 11.1 per cent.
Major lenders have already begun raising rates on mortgages as the conflict has raged. On Friday, NatWest, Skipton Building Society and the Co-Op Bank announced cost increases for their fixed-rate mortgages.
It followed similar moves earlier in the week from HSBC, Nationwide, Santander and Coventry Building Society.
Meanwhile, the conflict threatens to pile further pressure on Britain’s already fragile public finances as the interest rate on UK government debt jumped last week amid mounting fears of an inflation surge and concerns that Britain is more exposed to rising energy prices than other developed nations.