Brokers brace for prolonged high rates as hopes of Bank of England cutting in 2026 fade
Keir Starmer has warned of the “real‑world” impact as the Iran crisis darkens rate outlook for borrowers, predicting that a prolonged conflict will affect the “lives and households of everybody”.
It is a stark reminder from the Prime Minister that the war in the Gulf is set to filter directly through to inflation, interest rates and mortgage deals. His comments crystallise what markets have been signalling for days: the prospect of early Bank of England rate cuts has largely evaporated, replaced by a renewed “higher for longer” narrative on borrowing costs.
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Only recently, many advisers were guiding clients to expect a gentle easing cycle from Threadneedle Street later this year. That script is now being hastily revised. Oil prices have surged on fears of disruption to supplies through the Strait of Hormuz, government bond yields have climbed sharply, and investors have stripped out expectations of near‑term cuts – even assigning some probability to Bank Rate rising again if inflation proves stubborn.
Starmer said: “The job of government is obviously to get ahead, to look around the corner, to work with others, and the chancellor speaks to the governor of the Bank of England on a daily basis … assessing the risks, monitoring and talking to our international partners as well about what more we can do together to reduce the likely impact on people here and businesses here, of course.
“But it is important to acknowledge that work is needed, because people will sense … that the longer this goes on, the more likely the potential for an impact on our economy, impact into the lives and households of everybody and every business.
“And our job is to get ahead of that, to look around the corner, assess the risk, monitor the risks, and work with others in relation to that.”
He added: “Decisions about what’s in Britain’s best interests are decisions for the prime minister of Britain, and that’s how I’ve approached all of the questions and all the decisions that I’ve had to make.
“I do understand the anxiety now, at nine days into this conflict, where a number of people will be saying ‘well, now is the situation going to get worse, and how’s it going to impact me and my family?’ At the moment, what we’re doing is monitoring the risk, working with others to mitigate the risk.”
War, oil and the Bank of England
The latest phase of the Iran‑centred conflict has pushed Brent crude back towards levels not seen since the energy shock of 2022, with benchmark prices briefly punching into three‑digit territory before easing on talk of international reserve releases. Higher crude costs are already feeding through to petrol and diesel, with motoring groups warning that unleaded and diesel pump prices are likely to move materially higher over the coming days.
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Ministers insist that the UK has sufficient oil and gas supplies in the short term and the prime minister has continued to highlight that inflation is lower than its peak and, on official forecasts, moving in the right direction. Yet the political framing sits uneasily with market concerns that another energy‑driven shock will complicate the final descent of inflation back to the Bank’s 2% target.
That matters because it shapes the Monetary Policy Committee’s room for manoeuvre. An oil‑led rise in headline inflation, coupled with pressure on wages as households grapple with higher living costs, risks tying policymakers’ hands. Instead of cutting Bank Rate to support a fragile economy, they may feel compelled to hold – or, in a darker scenario, tighten – to quell any renewed inflationary momentum.
Gilt yields and swaps reset the curve
Financial markets have responded with notable speed. Yields on two‑year gilts, a key reference point for shorter‑dated mortgage funding, have leapt from the mid‑3% range to comfortably above 4% in a matter of days, a swing reminiscent of the volatility seen in the aftermath of the 2022 mini‑Budget. Longer‑dated borrowing costs have also ratcheted higher as investors re‑price the path of inflation and policy rates.
In the swaps market, which has a more direct bearing on fixed‑rate mortgage pricing, the shift has been just as striking. Two‑ and five‑year swaps have moved materially higher, reversing much of the gentle decline that underpinned recent cuts to headline mortgage rates. For banks and building societies that had been pricing in a sequence of Bank of England cuts, this marks a clear change of direction and forces a re‑examination of funding assumptions.
As one senior broker put it, markets had grown comfortable with a story of “rate cuts later this year”. The flare‑up in the Middle East, and the knock‑on effect on energy and bond markets, has “shifted that tone quite quickly”, as geopolitical risk bleeds into the rate curve.
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Lenders pull and reprice fixed deals
The market reaction is already visible in lenders’ product ranges. A growing roster of major and mid‑tier institutions has either increased mortgage rates or withdrawn fixed‑rate deals altogether while they reassess their pipelines.
High street names have announced fresh rounds of repricing, with increases across residential purchase and remortgage ranges, as well as for existing borrowers seeking further advances. Several building societies have followed suit, adjusting fixed rates upwards after seeing their own funding costs climb.
In the specialist and buy‑to‑let space, the response has been even more abrupt. Some lenders have pulled all fixed‑rate products at short notice, leaving only tracker ranges on sale, while others have set tight submission deadlines for brokers hoping to secure existing terms. Advisers report that certain five‑year fixes and niche products have disappeared entirely or returned with noticeably higher coupons.
These changes come on top of a gradual firming in average rates tracked by market monitors. The typical two‑ and five‑year fixed rates, which had been edging lower in recent weeks, are now ticking back up, suggesting that the direction of travel has turned once more.
Photograph caption: Simon Dawson / No 10 Downing Street (cropped)
