British lenders are already ditching plans to cut mortgage rates as war in the Middle East stokes fears of a fresh inflation shock.
Borrowing and savings specialists Moneyfacts said ‘several lenders have pushed pause on planned rate cuts’ – dashing the hopes of millions of families hunting for cheaper home loans.
It said the moves have come ‘in response to the conflict in the Middle East and its potential economic repercussions’.
And experts warned mortgage rates could even start to rise again having been on a downward trajectory for months.
The US-Israel war with Iran has sent the price of oil and gas soaring as supplies are disrupted and the conflict threatens to spread through the region.
Lenders are pausing plans to cut mortgage rates as inflation fears mount
The price of crude oil topped $85 a barrel for the first time since July 2024 this week while gas prices have almost doubled as Iran holds the world hostage by effectively closing the Strait of Hormuz – a crucial shipping channel where the Persian Gulf flows into the Arabian Sea.
Sanjay Raja, chief UK economist at Deutsche Bank, warned of a looming ‘energy price shock’.
The Resolution Foundation said the surge in energy prices could add one percentage point to inflation as well as £500 to a typical energy bill.
Ruth Curtice, chief executive at the think tank, said: ‘If increases to oil and gas prices are sustained, we could see inflation back at 3 per cent by the summer.’
Rohan Khanna, an analyst at Barclays, said the surging energy prices have revived memories of the inflation shock following Russia’s invasion of Ukraine.
‘Investors are basically going back to the 2022 energy-shock template,’ he said. ‘That is very fresh in our minds.’
The threat of a new inflation shock has shattered hopes of interest rate cuts this spring.
The chances of another reduction by the Bank of England this month have tumbled from around 80 per cent last week to just 20 per cent.
Experts warn the Bank may not cut interest rates at all this year.
This has fed through to so-called swap rates, which fixed mortgage deals are priced on, and lender are now responding by abandoning plans for further cuts to the price of home loans.
Adam French, head of consumer finance at Moneyfacts, said: ‘Swap rates have been rising sharply as conflict with Iran spreads across the Middle East, driving oil and gas prices higher and reigniting inflation concerns.
‘The immediate consequence has been higher gilt yields and a rapid shift in interest rate expectations, with the prospect of a Bank of England base rate cut later this month now looking far less certain.
‘For the mortgage market, the impact is almost instantaneous. Some lenders have already paused or reconsidered planned rate reductions.
‘Because fixed mortgage pricing is closely linked to swap rates, this sudden market movement risks halting the recent momentum towards lower mortgage rates just as borrower confidence had begun to build ahead of an anticipated rate cut.
‘It serves as a stark reminder that mortgage costs are not driven solely by domestic policy decisions.
‘Global geopolitical events move markets, markets move swap rates, and swap rates ultimately shape the deals available to borrowers – all while the world watches deeply troubling events unfold.’
Andrew Hagger, founder of independent information website MoneyComms, added: ‘We had expected mortgage rates to come down but that is potentially not going to happen for a little while depending on how long the conflict drags on.’
And Samuel Mather-Holgate, of financial planner Mather & Murray Financial, said: ‘The downward trajectory of swaps is no more.
‘On the back of events unfolding in the Middle East, there’s every chance mortgage rates will rise again.’
Concerns about the outlook for inflation and interest rates – and the government’s spending plans – have pushed borrowing costs higher on the bond markets.
The ten-year gilt yield – a key measure of how much it costs the UK government to borrow – rose back above 4.5 per cent this week and is the highest among the G7 nations.
George Lagarias, chief economist at Forvis Mazars, said: ‘The conflict in the Middle East is wreaking havoc with growth, inflation and rate projections as they play out in UK bond markets.
‘Yields across the board are rising as markets begin to price in higher inflation and fewer rate cuts as a result of the partial closing of the Straits of Hormuz.
‘The fallout from the conflict adds further to growth worries. Markets are now projecting one instead of two interest rate cuts for 2026 by the Bank of England.’
The Bank has cut rates six times since August 2024 – bringing them down from 5.25 per cent to 3.75 per cent – and it was hoped further rate cuts would follow this spring.
Analysts warned the latest forecasts from the Office for Budget Responsibility – published alongside the Chancellor’s Spring Statement this week – for inflation to return to the 2 per cent target are now in serious doubt.
In a sign the forecasts are already out of date, OBR official David Miles warned the rises in energy prices will have ‘a material impact on inflation’ and were ‘unambiguously bad news’.
Sylwia Hubar, a UK economist at banking group Natixis, said: ‘Significant risks persist, particularly from the Middle East conflict. Should this conflict continue, potentially fuelling inflation while adversely affecting economic growth, the Bank of England may ultimately keep the Bank Rate unchanged this year.’