Expectations of further Bank of England rate cuts this year have been shaken following renewed conflict in the Middle East, which has driven energy prices and government bond yields sharply higher. Just a week ago, markets were almost certain that the Bank would reduce its base rate by 0.25 percentage points in March, but following escalating tensions involving the US and Iran, the probability of a cut this month has fallen below 5 per cent, with April now less than 50 per cent likely.
The Bank’s base rate currently sits at 3.75 per cent, having been cut four times last year as inflation eased to 3 per cent. Governor Andrew Bailey had previously indicated that a return to the 2 per cent inflation target was “baked in,” but the geopolitical shock has disrupted that outlook.
UK wholesale gas prices have surged by around 40 per cent in recent days, while oil prices have neared $80 per barrel. At the same time, two-year gilt yields have climbed to their highest since December, reflecting concerns over the potential inflationary impact of rising energy costs. Analysts warn that prolonged disruption to global energy supplies, particularly through the Strait of Hormuz, could keep inflation elevated for longer, forcing the Bank to reconsider its plans for further rate cuts.
Tony Redondo, founder of Cosmos Currency Exchange, highlighted the sudden shift in market expectations, noting that high-street banks are prioritising margin protection amid rising swap rates rather than competing on price. This volatility means mortgage deals could change rapidly, with some “best-buy” offers withdrawn at short notice as lenders factor in the geopolitical risk premium.
Swap rates, which underpin fixed-rate mortgage pricing, have already risen sharply alongside gilt yields. As lenders typically set mortgage rates several days in advance, any ongoing volatility is likely to feed directly into the housing market, affecting both buyers and those looking to remortgage.
Riz Malik, director at R3 Wealth, compared the situation to market turbulence seen in 2022, warning that the outlook for mortgage approvals and rates could change dramatically. He advised homeowners with upcoming mortgage renewals to act promptly and review their options rather than delaying decisions.
Justin Moy of EHF Mortgages stressed that the duration of the Middle East conflict will be decisive. If the conflict is resolved quickly, rate-cut expectations may resume. But a prolonged crisis could push inflation higher and put further monetary easing on hold, making mortgage deals more expensive.
Aaron Strutt from Trinity Financial emphasised the uncertainty facing borrowers. He advised those approaching remortgage deadlines to secure rates now, given the unpredictable environment, which could see rates rise or fall sharply depending on developments abroad.
Some experts note that while the situation is serious, it differs from the disorderly repricing seen in autumn 2022. Nouran Moustafa of Roxton Wealth pointed out that lenders are now better prepared, with mortgage pricing reacting to sustained trends rather than short-term market swings.
Moustafa added that the key issue is whether elevated gilt yields persist. If they remain high, lenders may reprioritise stability or even withdraw certain mortgage products at short notice. If yields drop back, the market could stabilise quickly.
The Bank of England faces a delicate challenge. Although inflation had been easing and growth remains fragile, an externally driven energy shock risks reversing progress, forcing policymakers to weigh the timing of rate cuts carefully.
If wholesale gas prices and oil continue to rise, the Bank may delay easing to prevent inflation expectations from becoming unanchored, extending financial pressure on households and businesses already coping with high borrowing costs.
For now, monetary policy decisions are less about domestic economic indicators and more about developments in the Middle East. Any de-escalation could allow the Bank to resume its planned rate cuts, but worsening conflict may quickly derail those expectations.
In the meantime, borrowers and investors are reminded of the speed at which global geopolitical events can reshape interest rate forecasts, highlighting the vulnerability of financial markets to sudden external shocks.
Ultimately, the direction of UK interest rates in 2026 now hinges on factors well beyond the domestic economy, underscoring the complex interplay between geopolitics, energy markets, and monetary policy.
As the situation unfolds, homeowners, investors, and policymakers alike must remain vigilant, as even short-term disruptions in the Middle East can have immediate and far-reaching effects on borrowing costs and market confidence.
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