Sharp rises in the price of oil and gas as a result of the war in Iran have set off an economic chain reaction which is already hitting people in the pocket.
The benchmark Brent crude oil remains above $110 a barrel, compared to around $72 before the war.
And a unit of wholesale gas now stands at 150p – almost double the 77p per unit it was just three weeks ago.
As a result, it is thought that inflation – which was anticipated to fall to 2% by the end of the year – could, in fact, now reach 5%, according to Thomas Pugh, the chief economist at accounting firm RSM.
While City traders believe there could be three more interest rate hikes coming later this year.
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And as these forecasts tick up, so too does the chance of an interest hike.
Towards the end of February the consensus was that borrowing costs would come down this year – the focus of the discussion was simply by how much, and when.
But today, before the Bank of England announced it was keeping the base interest rate at 3.75%, the debate among traders moved.
No longer were they wondering whether there would be a cut, nor whether rates would remain the same. Instead, there was a 3% chance of an increase.
Those same traders have now priced in an increase in June, although it could come as soon as next month, when the energy price cap is expected to rise due to the elevated wholesale energy costs.
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April’s meeting of the interest rate setters at the Bank of England is now on a knife-edge, with a 51% chance of no change and a 49% likelihood of a cut, according to London Stock Exchange Group (LSEG) data.
For now, traders believe there will likely be three hikes in 2026, coming in June, July and December.
If they come to pass, the interest rate will be brought to 4.5% by the end of the year.
That is in sharp contrast to where we were at the very start of the month. At that point, the interest rate was thought to fall to 3.25% before the end of 2026.
Not everyone agrees, however. Provided there aren’t yet more upticks in oil prices, and it remains below $125 a barrel, economic research firm Pantheon Macroeconomics thinks the Bank has enough room not to make change to its base interest rate.
Impacts already here
Even if none of this comes to pass, the prospect of these higher rates is already hitting those looking to remortgage.
Average mortgage rates are at year-long highs.
The typical two-year fixed mortgage rate jumped to its highest since April 2025: from 4.83% at the start of the month to 5.3% on Thursday, according to financial information company Moneyfacts.
An average five-year fixed deal has not been this high since August 2024, rising from 4.95% at the beginning of March to 5.35%.
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“Conflict in the Middle East has caused a significant increase in global energy and other commodity prices, which will affect households’ fuel and utility prices and have indirect effects via businesses’ costs,” the Monetary Policy Committee said.
“CPI inflation will be higher in the near term as a result of the new shock to the economy.”
