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Explaining to the British public on Nicky Campbell’s Five Live show how missile strikes on an Iranian oil facility trigger a cascading impact felt all the way through mortgage markets is a particular challenge. Such events, though seemingly remote, quickly ripple through the economy, as can be heard firsthand from farmers limiting their red diesel usage and homeowners facing withdrawn mortgage offers. These personal experiences give a vivid dimension to otherwise abstract economic data.
Despite none of Iran’s gas supplies reaching the UK, the rapid transmission of financial shockwaves is remarkable, especially for someone who has followed inflation dynamics for over 25 years. Recently, after attending a Bank of England press session and interviewing its governor, it became clear that the anticipated interest rate cuts will not materialize now that conflict has arisen. The Bank’s projections suggest inflation, once expected to ease back to 2%, will in fact peak around 3.5% in the near months based on recent oil and gas prices, with potential for even higher inflation should prices remain elevated.
This reversal in expectations sent shockwaves through financial markets. The Bank of England’s decision to hold interest rates steady triggered a sharp rise in long-term UK government bond yields, reflecting investor bets on multiple rate hikes occurring later in the year. While this market reaction seemed somewhat exaggerated, the broader economic outlook is now uncertain, with near-term prospects subject to significant shifts influenced by geopolitical tensions thousands of miles away. Earlier signs hinted at improving conditions, such as recent jobs data suggesting a turning point, but the current energy price surge has disrupted that trajectory.
During the interview, the governor emphasized that the markets might be overestimating the likelihood of rapid interest rate increases. He cautioned, “I would caution against reaching any strong conclusions about raising interest rates,” and stressed that the prudent approach remains to keep rates on hold for now. The Bank intends to monitor the conflict’s progression carefully, acknowledging that the current situation differs from the 2022 energy shock triggered by Russia’s invasion of Ukraine. Inflation may rise higher than previously forecast but is unlikely to approach the extreme levels seen four years ago. Ultimately, the Bank is in a “wait and see” posture, recognizing that monetary policy adjustments cannot directly resolve disruptions to gas supplies or shipping lanes. Meanwhile, the fallout from the war—over just three weeks—has already upended what appeared to be an imminent rate cut, sent inflation off course, raised government borrowing costs, and altered the fixed-rate mortgage landscape, affecting housing markets. Unsurprisingly, both the governor and the chancellor are urging for a de-escalation of tensions
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