The Bank of England’s latest report provides insight into how the Iran war could affect household finances in the UK. The conflict in the Middle East is influencing the economy, with potential consequences for mortgages, energy bills, and the job market.
Interest rates and mortgage payments
Although the Bank of England kept interest rates on hold recently, the report indicates that rate increases could occur later this year due to uncertainty about the war’s severity and duration. The Bank considered several scenarios, including one where energy prices slowly fall, suggesting one or two rate rises might happen. In a more adverse scenario, with oil prices above $120 a barrel and inflation exceeding 6%, there could be up to six rate rises, pushing the base rate to 5.5%.
Any rise in interest rates would increase borrowing costs but also improve returns on savings. Currently, over seven million homeowners have fixed-rate mortgages, which means their rates will not change until their deals expire, typically after two or five years. The Bank expects that average monthly payments for those moving to new mortgage deals could rise by about £80 over the next three years. However, this is an average figure, and actual changes will vary depending on energy prices and other factors.
About 53% of mortgage holders are expected to see payment increases, while around 25% who fixed at higher rates may see payments fall despite recent rate rises.
Rising energy costs and inflation
The Bank of England anticipates that domestic energy bills will rise this summer due to the conflict. The energy price cap set by Ofgem currently limits annual bills to around £1,641 for a typical household, but this is expected to increase to nearly £1,900 in July and remain at that level for the rest of the year. This peak is lower than the spike seen after Russia’s invasion of Ukraine in 2022.
Nearly 40% of households are on fixed energy tariffs, offering some protection from price increases until contracts end. Households using prepayment meters may reduce energy use during warmer months, but if prices remain high in winter, they could face larger cost increases.
Rising energy prices contribute to higher inflation, which is expected to accelerate this year. Food price inflation could reach 4.6% in September and may rise further later in the year. Since food and fuel are essential expenses, lower-income households will be disproportionately affected, as these costs consume a larger share of their income.
The Bank notes that while some people can reduce energy use or use savings to cover higher bills, this is more difficult for lower-income families. Compared to 2022, a larger proportion of these households now have less than two weeks’ income saved.
Impact on jobs and wages
UK unemployment has been rising steadily over the past year, despite a recent unexpected drop. The Bank warns that unemployment could increase further as households save more and spend less due to economic uncertainty. Reduced demand may lead firms to cut back on hiring, especially as they face higher energy costs.
Although inflation is expected to rise, the Bank does not anticipate this will immediately lead to higher wages in 2026, since most pay settlements for that year are already completed. However, some committee members suggested that higher inflation could influence wage negotiations in 2027.