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UK mortgage lenders have started increasing their interest rates amid concerns that the ongoing conflict in the Middle East could lead to heightened inflation, making further rate cuts by the Bank of England less likely. Nationwide has announced rate hikes of up to 0.25% on several of its mortgage products, with HSBC UK and Coventry Building Society following suit with similar increases.
These adjustments reflect a shift in market expectations regarding the Bank of England’s future interest rate decisions. When setting mortgage rates, lenders closely monitor financial market indicators known as “swap rates,” which signal where the market believes official rates are headed. A spokesperson from Nationwide explained that recent global events have caused a significant rise in swap rates, prompting them to raise mortgage rates accordingly, though they emphasized that their adjustments are more moderate than the rise in swap rates. The lender also reaffirmed its commitment to supporting current customers through their pricing pledge.
HSBC has raised interest rates for new mortgage customers by between 0.10% and 0.25%, and existing customers by 0.04% to 0.13%. Coventry Building Society will implement rate increases starting Monday, attributing the changes to shifts in swap rates as well, but assuring customers that competitive deals remain available. According to Moneyfacts, the average rate for a two-year fixed mortgage is currently 4.84%, while the average five-year fixed rate stands at 4.96%.
Experts warn that if energy prices remain elevated due to the Middle East situation, inflation could rise further, potentially causing the Bank of England to delay or slow down interest rate reductions. David Hollingworth of L&C Mortgages pointed out that the conflict has fueled expectations of higher inflation, which can increase the cost for lenders to offer fixed-rate deals, pushing mortgage rates upward. Amanda Bryden from Halifax noted that geopolitical tensions are influencing inflation outlooks and the anticipated pace of rate cuts, suggesting borrowing costs may ease more gradually than previously thought.
Last month, the Bank of England held its interest rates at 3.75%, with then-governor Andrew Bailey indicating that some reduction might follow later in the year. However, the evolving geopolitical landscape has cast doubt on this forecast. An economic think tank, the National Institute of Economic and Social Research, recently warned that persistent high energy prices could force the Bank to raise rates above 4% again. The Bank of England is scheduled to announce its next interest rate decision on 19 March.
Mortgage specialist Karen Noye from Quilter attributed some of the rate changes to increased lender demand, as a previous period of lower rates led to a surge in applications. She advised prospective borrowers to secure fixed-rate deals promptly, since rates are expected to remain volatile until geopolitical risks subside and inflation stabilizes. Noye highlighted that many lenders allow rates to be locked in up to six months before the mortgage starts, offering borrowers protection against future increases, with some products allowing even longer coverage. Adam French of Moneyfacts cautioned that sustained inflation inflicts more long-term harm on households than delayed interest rate cuts, stressing that inflation steadily erodes financial stability over time
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