Markets now see just one Bank of England rate rise this year as oil prices fall
City expectations for UK interest rates shifted on Wednesday after the announcement of a two-week ceasefire involving the US and Iran, easing concerns that a prolonged conflict would drive another surge in energy prices.
Money markets are now fully pricing in a single increase in the Bank of England base rate by December, which would take the Bank of England’s base rate from 3.75% to 4%. The move marks a sharp change from mid-March, when investors had priced in as many as three increases this year.
The repricing followed a drop in oil prices. Brent crude, the international benchmark, fell 13.3% in morning trading to $94.71 (£70.39) a barrel, from about $109 (£81) before reports of the ceasefire proposal. Traders had pushed up rate expectations earlier in the week as US president Donald Trump warned that a “whole civilisation will die” unless Tehran complied with his demands to reopen the Strait of Hormuz.
In UK rates markets, the two-year gilt yield fell to about 4.1%, reflecting reduced expectations of near-term tightening. Analysts said the UK’s sensitivity to global energy prices had been a key driver of recent volatility, given the risk that higher fuel costs feed through to inflation and wage demands.
The latest shift in sentiment comes ahead of the Monetary Policy Committee’s next scheduled meeting on 30 April, which falls after the ceasefire deadline. Economists broadly expect policymakers to keep rates unchanged at the meeting, but views in the City remain split on whether the next move later in the year is more likely to be a cut or a further rise.
For mortgage brokers, the market focus has been on swap rates, which underpin many fixed-rate products. Those rates rose during the early stages of the conflict, pushing up pricing for new deals even as some economists argued that the Bank might tolerate a temporary inflation shock.
Mortgage pricing has moved significantly over the past weeks. According to Moneyfacts, the average two-year fixed-rate mortgage rose from 4.83% at the start of March to 5.90% on Wednesday, the highest level since July 2024.
Adam French (pictured right), head of consumer finance at Moneyfacts, warned that the fall in market rates would not necessarily translate into rapid cuts for borrowers. “Rates are likely to remain higher for some time yet,” he said. “The volatility of the conflict can quickly move markets, which may leave many lenders cautious about making any sudden moves.
“The longer the ceasefire holds and markets calm, the more the mortgage market will stabilise, and rates could even begin to edge lower. But for now, it’s more likely to slow or pause increases rather than trigger any sharp falls.”
Beyond the UK, investors are also watching the eurozone, where markets expect the European Central Bank to raise rates twice this year in response to the inflationary effect of higher energy costs. That international backdrop, along with the risk that hostilities resume after the ceasefire, is likely to keep mortgage funding conditions unsettled in the near term.
Warnings from international bodies have added to the caution. The OECD has said the UK could be among the worst-hit advanced economies from an energy price shock, with weaker growth and higher inflation than many peers. The IMF has also highlighted the UK’s exposure to disruption in trade flows through the Strait of Hormuz.
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