Expectations of further interest rate cuts from the Bank of England this year were called into question after the escalating conflict in the Middle East triggered a sharp rise in energy prices and government bond yields, raising fears of a fresh inflation shock.
Just a week ago, markets were confident that the Bank of England would cut interest rates again at its March meeting, with traders pricing in a 0.25 percentage point cut with an 86 percent chance. Following the military escalation between the US and Iran and renewed instability in the Gulf region, these expectations have now collapsed. Markets currently estimate a less than 5 percent chance of a rate cut this month and a less than 50 percent chance of a rate cut in April.
The bank’s key interest rate is currently 3.75 percent and was cut four times in 2025 when inflation fell to 3 percent. Gov. Andrew Bailey had previously indicated that a return to the 2 percent target was “firmly entrenched.” However, the geopolitical shock has significantly changed this outlook.
British wholesale gas prices have risen by around 40 percent in recent days, while oil prices have approached $80 a barrel. Two-year Treasury yields have risen to their highest since December as markets reassess the inflationary impact of higher energy costs.
The risk, analysts say, is that continued disruption to global energy supplies, particularly through the Strait of Hormuz, could keep inflation higher for longer and force the Bank of England to pause or even reverse its easing cycle.
Tony Redondo, founder of Cosmos Currency Exchange, said the change in expectations has been dramatic.
“With two-year Treasury yields hitting highs in December due to a 40% rise in UK gas prices and oil prices approaching $80, the Bank of England faces a significant inflation shock,” he said. “Big box banks are no longer competing on price, but are instead protecting their margins from rising swap rates. Buyers may see best-buy deals withdrawn with just a few hours’ notice as lenders factor in the geopolitical risk premium.”
Swap rates underlying the fixed rate mortgage have risen sharply in response to higher gilt yields. Lenders typically price mortgage products several days in advance, meaning further volatility could quickly impact the property market.
Riz Malik, director at R3 Wealth, warned that the situation could be similar to the market turmoil in 2022 following Russia’s invasion of Ukraine and the UK’s mini-fiscal crisis.
“Last week the outlook for the 1.8 million mortgages coming up for renewal in 2026 was promising,” he said. “Today we could see a lot of volatility in the mortgage market and the prospect of further cuts will disappear by the second. If you have a mortgage extension in the next six months I would strongly recommend that you consider your options and not delay.”
Justin Moy, managing director of EHF Mortgages, said the length of the conflict was crucial.
“In the short term, any talk of interest rate cuts will be moot,” he said. “If the conflict resolves within a few weeks, this may be temporary. However, if it continues beyond Easter, inflation and key interest rate expectations will be negatively impacted, slowing rate cuts and driving up business.”
Aaron Strutt, product and communications director at Trinity Financial, said uncertainty is the defining feature of the current environment.
“We don’t yet know what will happen. Interest rates could rise, the war could stop and interest rates could fall again, as previously predicted. In any case, it makes sense to lock in a mortgage rate if you need to remortgage soon.”
Some advisers believe that the situation, while serious, is structurally different from the disorderly fall 2022 reassessment.
Nouran Moustafa, practice director at Roxton Wealth, said lenders were better prepared than during the turmoil of the Truss era.
“Markets have moved quickly, but mortgage prices are responding to sustained trends rather than individual sessions,” she said. “In 2022, financing costs developed in a disorderly and rapid manner. Today’s development looks more like volatility driven by inflation expectations.”
She added that the key question is whether the high returns will continue. “If yields remain high for several days, there could be short-term revaluations or selective withdrawals. If this declines, lenders will prioritize stability.”
The Bank of England now faces a delicate balancing act. While inflation has eased and economic growth remains fragile, there is a risk that an externally driven energy shock could lead to renewed cost pressures, just as policymakers were preparing for further easing of monetary conditions.
If wholesale gas prices remain high and oil prices continue to rise, rate setters may find it prudent to delay cuts to prevent inflation expectations from becoming unanchored. This would increase pressure on households and businesses already struggling with high borrowing costs.
Further developments initially depend less on domestic economic data and more on developments in the Middle East. If tensions ease and energy prices fall, the easing cycle could resume. However, if the conflict intensifies or expands, expectations of multiple rate cuts in 2026 could quickly disappear.
In the meantime, borrowers and investors alike are reminded that global geopolitical events can alter monetary policy forecasts in a matter of days.
