Is the latest outbreak in the Middle East going to hurt the mortgage industry?
Escalating hostilities between Israel and Iran have thrown fresh uncertainty into the Bank of England’s carefully calibrated plan to ease interest rates, after Brent crude prices surged and inflationary risks resurfaced just days before the central bank’s next policy decision.
In the early hours of Friday morning, Israel launched a significant military strike on Iranian targets, in what analysts called an unprecedented escalation of long-simmering tensions. In response, Iran reportedly launched around 100 drones towards Israeli territory. The prospect of prolonged conflict in the Middle East—particularly involving one of the world’s key oil-producing regions—sent benchmark oil prices sharply higher. Brent crude rose more than 10% at one stage, trading as high as $72.80 a barrel in London before settling slightly lower by mid-morning.
The increase in energy prices has revived concerns that global inflation could prove more persistent than expected. In Britain, the knock-on effect is likely to reinforce the Bank of England’s caution about loosening monetary policy too rapidly—particularly given its recent efforts to counter entrenched wage and price pressures.
While inflation in the UK has come down significantly from its double-digit highs in 2022, the Consumer Price Index still stood at 3.4% in April, above the Bank’s 2% target. Core inflation remains elevated, and wage growth, though slowing, remains above 5%. As it stands, all 60 economists polled by Reuters this month expect the Monetary Policy Committee to leave the Bank Rate unchanged at 4.25% next week, following a quarter-point cut in May—the first since 2023. Most expect another reduction in August and a further cut to 3.75% by year-end. However, market pricing has grown more tentative in recent days, amid concerns that higher energy prices could delay the Bank’s trajectory.
"The path of the market into the August forecast round comes down to the market's assessment of the risk around alterations to guidance," said Moyeen Islam, a fixed income strategist at Barclays.
The MPC’s decision in May revealed a deepening rift among its members. The 5-4 vote split three ways, with two members calling for a more aggressive 50-basis point cut, and two—including Chief Economist Huw Pill—preferring to hold rates at 4.5%. That division, along with the geopolitical developments, suggests that next week’s decision may come with more cautious language, even if the outcome itself is a foregone conclusion.
The latest labour market data provided some justification for continued easing. Figures released earlier this week showed the sharpest fall in payrolls in five years and the highest jobless rate since 2021. Yet the renewed volatility in oil markets may complicate the Bank’s balancing act.
“Energy traders will now be watching how much the conflict worsens in the coming days,” Vandana Hari, an energy analyst at Vanda Insights told the BBC. Some market observers, including Capital Economics, warn that if Iran’s oil infrastructure were to be targeted directly, Brent crude could rise to as much as $100 a barrel—a level not seen since the immediate aftermath of Russia’s invasion of Ukraine in 2022.
Such an outcome would likely feed into higher fuel and transportation costs in the UK, with potential spillovers into broader consumer prices. Though analysts expect other oil producers to step in to stabilise prices, the threat of a supply disruption through the Strait of Hormuz—a vital artery for global oil shipments—remains a potent risk.
Meanwhile, global equity markets have reacted nervously to the news. The FTSE 100 was down 0.4% by mid-morning, mirroring falls in Asia. Safe-haven assets such as gold and the Swiss franc posted gains, with gold reaching a two-month high. For homeowners and mortgage borrowers in Britain, the implications are sobering. While swap rates—the benchmarks used by lenders to price fixed-rate mortgages—had been drifting lower on expectations of further Bank of England cuts, the recent surge in oil has driven yields higher again. That could limit lenders' ability to reduce mortgage costs in the short term, even as the economy slows.
In April, the UK economy posted its sharpest monthly contraction since 2023, as the end of a temporary tax break and the first effects of US tariffs under President Trump weighed on activity. Exports to the United States fell by a record £2 billion that month, according to official figures.
While policymakers in Frankfurt and Washington have moved more swiftly to ease rates—both the European Central Bank and the Federal Reserve have cut borrowing costs multiple times in the past year—the Bank of England remains cautious. As Investec economist Ellie Henderson wrote in a client note, "Policy seems to be in a good position, allowing the BoE to wait and see how economic conditions and the international political backdrop evolve."
With Middle East tensions threatening to reignite global inflationary pressures, that caution looks more justified than ever.
