Interest rates to shares

How effects of war could be felt at home

- Zoe Wood Rupert Jones

The war in the Middle East is thousands of miles away, but gyrations in financial markets and surging energy prices threatena new cost of living crisis in the UK. Here’s howit could affect your finances.

Interest rates and mortgages

Britons benefited from cheaper home loans in recent months after the Bank of England cut interest rates four times in 2025 to bring the base rate down to 3.75%. But that could be about to change.

Until Friday, the chance of another rate cut this month had been 80%. Nowitis less than 30%, with traders now expecting just one cut by the end of the year - down from two last week.

If the current spike in energy costs were to last fora year, interest rates could climb to 4.5%, according to the National Institute of Economic and Social Research.

The thinktank modelled the impact of oil and gas prices increasing by 30% and 50% respectively over one year. This would stoke inflation in 2026 and into 2027 and propel the base rate to 4.5%, it said. (This is based on rates staying at 3.75% rather than falling as expected this year.)

The pricing of fixed-rate mortgage deals is largely dictated by money market swap rates, which are currently at 30-day highs in response to the conflict.

Energy bills

Just last week, there was cause for celebration after the energy regulator, Ofgem, said its price cap would fall 7% from April to the equivalent of £1,641 for a typical annual dual-fuel household.