British households are bracing for a sharp increase in the cost of living, as surging oil and gas prices triggered by the war in Iran threaten to drive inflation higher and prompt multiple interest rate hikes this year. This conflict represents the latest in a series of economic shocks, following the COVID-19 pandemic, the war in Ukraine, and the Liz Truss mini-budget, further straining the UK economy.
Energy Market Turmoil and Global Impact
Since the conflict began, Tehran has launched retaliatory strikes on energy sites in the Gulf and throttled the key shipping route of the Strait of Hormuz. In response, Israel has targeted Iran's South Pars gas field, the largest of its kind globally. These actions have sent energy markets into turmoil, with benchmark Brent crude oil prices soaring to around $110 a barrel, up from $72 before the war. Wholesale gas prices have nearly doubled, reaching 150p per unit compared to 77p just three weeks ago.
Economic Forecasts and Bank of England Response
Economists now predict that inflation in the UK could hit 5% this year, a significant shift from pre-war expectations of a drop to 2%. Interest rates are anticipated to be hiked two or even three times, with some City traders forecasting increases in June, July, and December, potentially raising the base rate to 4.5% by the end of 2026. The Bank of England announced on Thursday that it would keep the base rate at 3.75% for now, but the outlook has changed dramatically due to the conflict.
Impact on Mortgages and Borrowing Costs
Mortgage rates are already feeling the pressure, with the typical two-year fixed rate jumping to 5.3%, its highest since April 2025, and average five-year fixed deals reaching 5.35%, the highest level since August 2024. Meanwhile, governments are facing a sharp increase in borrowing costs, with UK rates rising at the fastest pace since the Liz Truss mini-budget of 2022, further damaging growth prospects.
Government Measures and Political Reactions
The UK government has announced a £53 million package to assist households hardest-hit by the economic impact of the war, particularly those relying on heating oil. Prime Minister Sir Keir Starmer has emphasized the cost of living as a key focus, warning that families will feel the pressure of rising costs as the conflict continues. He advocates for a negotiated settlement with Iran, a position that has drawn criticism from the White House.
Defence and International Stance
While Sir Keir's opposition to the war and reluctance to join US-Israeli attacks is largely supported by the public, Defence Secretary John Healey stated that the UK would "step up" its defensive support for Gulf allies. He described Iranian attacks on energy sites in Saudi Arabia, Qatar, and Kuwait as a "serious escalation." RAF jets are among the British military forces deployed to the Middle East, with planners working on proposals to reopen the Strait of Hormuz in collaboration with the US and other allies.
As the prime minister prepares to speak during a visit to the South East, the economic fallout from the Iran conflict continues to unfold, posing significant challenges for households and the broader UK economy.
