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The Bank of England has provided insights into how the ongoing conflict in the Middle East could influence the UK economy and personal finances. This analysis comes amid growing uncertainty over the war’s impact on energy prices and inflation, prompting the central bank to evaluate several potential scenarios.
One notable point is the possibility of interest rate increases. Earlier this year, many economists anticipated a reduction in rates, but the conflict has shifted expectations. The Bank’s governor highlighted the uncertainty surrounding the conflict’s duration and severity, leading the rate-setting committee to consider different outcomes. In its primary scenario, assuming energy prices gradually decline, the committee suggests that one or two rate hikes may occur. However, if oil prices stay above $120 per barrel throughout the year and inflation surpasses 6% early next year, the Bank could impose up to six rate increases, pushing the base rate to 5.5%. Such rises would elevate borrowing costs but also potentially boost returns on savings.
Mortgage holders are also facing financial pressure. Over seven million UK homeowners have fixed-rate mortgages, representing about 87% of all mortgage contracts. While fixed rates remain unchanged until their term ends, the Bank projects that those transitioning to new deals over the next three years could see their average monthly payments rise by roughly £80. It’s important to note that this figure is an average and will vary, influenced partly by the future path of energy prices. Approximately 53% of mortgage holders are expected to experience increased payments, though around a quarter who secured higher fixed rates previously might see their costs decrease despite the rising interest rates.
Energy bills are set to climb once again, but not to the steep levels witnessed in 2022 after Russia’s invasion of Ukraine. With the ongoing conflict in the Middle East disrupting the energy market, the Bank predicts that the typical annual household energy bill, currently around £1,641 under Ofgem’s price cap, will rise to nearly £1,900 this summer and hold steady for the remainder of the year. Nearly 40% of households are on fixed energy tariffs, providing some protection until contracts expire. However, for those relying on prepayment meters, the warmer months offer an opportunity to reduce usage, though higher costs in winter could hit vulnerable households particularly hard.
The rising cost of living disproportionately affects lower-income families. Inflation, driven mainly by energy price increases, is expected to accelerate in 2026. Food price inflation alone may reach 4.6% by September and could climb higher later. Essential expenses such as fuel and food consume a larger portion of income for low-income households, making it harder for them to absorb these price rises. Unlike wealthier families, who may manage by reducing energy use or drawing on savings, many lower-income households have less than two weeks’ worth of income saved, a situation that has worsened compared to 2022. While borrowing options have expanded, they come with their own financial challenges.
Additionally, the Bank signals that unemployment could increase as households prioritize saving over spending amid economic uncertainty. Slower consumer demand could lead businesses, already facing cost pressures from elevated energy prices, to curb hiring. Although wage growth might not fully reflect inflation this year, given that most pay agreements for 2026 are finalized, some committee members warn that elevated inflation may influence wage discussions in 2027
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