Energy bills, mortgages and more: How the Iran war may affect your money.

The escalating tensions and potential for a wider conflict involving Iran have already begun to ripple through global markets, sending a clear signal of the interconnectedness of geopolitical events and everyday finances. For households across the UK, the implications are already being felt, from the cost of filling up a car to the rates offered on home loans. How deep and sustained these financial pressures become will largely hinge on the duration and intensity of the conflict, as well as the resilience and speed of recovery in global supply lines and economies. Kevin Peachey, our Cost of living correspondent, outlines some of the key areas where your money could be impacted.

Fuel Prices for Motorists

Drivers have already witnessed a noticeable climb in prices at the pump, a direct consequence of the volatility in the global oil market. On Friday, average petrol prices reached an 18-month high of 140.6p a litre, representing a rise of nearly 8p since the initial escalation of the conflict. Diesel prices have seen an even sharper increase, surging by almost 17p to an average of 159.2p per litre, according to the RAC motoring organisation.

The primary driver behind these increases is the sharp rise in crude oil prices. Geopolitical instability in the Middle East, a region critical for global oil supply, inevitably sends shockwaves through the energy markets. Analysts suggest that every $10 increase in the price of a barrel of crude oil can translate to roughly a 7p per litre hike at the pumps. While crude prices are inherently volatile, reacting to every development in the conflict and commentary from major international players like the White House, a sustained period of elevated oil prices could easily push average petrol prices past the 150p per litre mark.

Although motoring organisations reassure the public that current supplies are plentiful, the advice remains cautious. Motorists are encouraged to reduce non-essential journeys and adopt more fuel-efficient driving styles, such as avoiding harsh acceleration and braking, to conserve fuel. The impact of rising fuel prices extends far beyond individual car owners. Increased transport costs for commercial vehicles, including those delivering goods to supermarkets, can lead to higher prices for a vast array of goods and services, including essential foodstuffs. This ripple effect can contribute significantly to broader inflationary pressures, impacting everyone regardless of whether they own a car. Businesses, too, face higher operational costs, which can ultimately be passed on to consumers or affect their profitability and investment decisions.

Cost and Choice of Mortgages

The UK mortgage market, which had shown signs of stabilising after a period of intense volatility, is once again facing headwinds. Just as expectations were building for potential cuts to the Bank of England’s base rate, the geopolitical uncertainty has shifted the landscape. Now, the opposite is happening.

Some of the UK’s largest lenders have already begun to raise their mortgage rates. This reaction stems from two key factors: an increase in their own funding costs and a revised expectation that the Bank of England’s base borrowing rate will not fall as quickly, or as much, as previously anticipated. Markets are now pricing in a longer period of higher interest rates, which lenders reflect in their product offerings.

The average mortgage rate for a two-year fixed deal rose to 5.10% on Friday, up from 4.84% just six weeks prior on March 6. This marks the highest level for such deals since July of the previous year. Similarly, five-year fixed mortgages saw an increase from 4.96% to 5.19% over the same period, now standing at their most expensive since April.

Beyond just price increases, times of heightened economic uncertainty often prompt lenders to reduce their risk exposure by withdrawing mortgage products from the market, thereby limiting consumer choice. Moneyfacts, a financial information service, reports that more than 500 residential mortgage products have been pulled recently. While this still leaves a substantial 7,147 deals available, the trend is significant. Adam French, head of consumer finance at Moneyfacts, notes, "When lenders take the step of pulling deals rather than simply tweaking pricing, it often indicates that funding costs have moved too quickly for incremental changes to keep pace." This rapid adjustment signals a fundamental shift in market conditions and lender sentiment. For homeowners looking to remortgage, or prospective buyers entering the market, these higher rates and reduced choices translate into increased monthly payments and potentially constrained purchasing power, further dampening activity in the housing sector.

Energy Bills and Heating Oil Costs

For the vast majority of UK households, there is a degree of protection in place for gas and electricity bills through the energy price cap set by the regulator Ofgem. This cap limits the maximum price per unit of energy for those on standard variable tariffs. Crucially, the current cap, which has seen prices decrease in April, is set until July. This means that for now, households are shielded from the immediate wholesale price increases.

However, the future is less certain. The wholesale energy market prices between now and late May will be the critical determinant for household bills from the summer onwards. A sustained period of high wholesale costs, driven by supply fears or disruptions related to the conflict, could lead to a sharp increase in the energy price cap for millions of people come July. The memory of the last major energy price spike following the Covid-19 pandemic and Russia’s invasion of Ukraine, which necessitated government intervention via the Energy Price Guarantee, looms large. Energy Secretary Ed Miliband has acknowledged the possibility, stating that "if it’s necessary to intervene, we will" on energy bills, though he qualified this by adding that any intervention would depend on the scale of the conflict’s impact.

Those not covered by the Ofgem price cap face a more immediate and stark reality. Households relying on heating oil, typically stored in tanks outside their properties, have no such protection. Campaigners report that prices for heating oil have more than doubled since the conflict began, exacerbated by panic buying that has added significant pressure on suppliers and limited orders. Emma Simpson, chief executive of Rural Action Derbyshire, highlights the urgency: "We may be heading into spring, but anyone running low on oil right now doesn’t have the luxury of waiting for prices to fall." The Competition and Markets Authority (CMA) is actively monitoring the situation, with Emma Cochrane confirming that "Generally, we would expect that customers who have placed orders for heating oil should receive it at the agreed price. Suppliers should be clear what they are charging and terms must be fair." This scrutiny aims to prevent unfair pricing practices amidst the crisis, but the underlying vulnerability of this segment of consumers remains pronounced.

Higher Cost of Living but with Limits

The specter of inflation, which had finally begun to recede, is now once again a significant concern. At the start of March, the Office for Budget Responsibility (OBR), the government’s official forecaster, projected that UK inflation would fall to around the Bank of England’s target of 2% over the next five years, estimating a rate of 2.3% this year and 2% annually from 2027. However, these calculations were made before the current escalation of the conflict involving Iran.

Analysts now believe this optimistic forecast is increasingly unlikely. The volatile military and economic situation makes precise inflation estimates incredibly difficult. While a return to the peak of 11.1% seen in the UK in October 2022 is not widely anticipated, the new pressures are undeniable. The key distinction from the Ukraine war’s impact is that the latter primarily caused spikes in basic foodstuffs like wheat and edible oil due to Ukraine’s role as a major producer. The current conflict, while potentially impacting global trade routes and insurance premiums, is primarily an energy shock.

However, higher energy costs permeate every sector of the economy. Businesses face increased operational costs for manufacturing, transportation, and heating, which are often passed on to consumers. This can lead to a general rise in the price of a typical basket of goods and services, eroding household purchasing power and placing renewed pressure on real wages. Other indirect inflationary pressures could emerge from disrupted supply chains, higher shipping costs, and increased insurance premiums for goods transiting affected regions.

Interest Rates Less Likely to Fall

The Bank of England’s primary mandate is to maintain price stability, aiming for an inflation rate of 2%. Its main tool for achieving this is the setting of interest rates. Following the February meeting of its rate-setting committee, Bank of England Governor Andrew Bailey had indicated there was scope for further rate cuts later in the year, boosting hopes for borrowers.

That prospect is now significantly more in doubt. The current geopolitical instability and the resulting inflationary pressures, particularly from energy prices, complicate the Bank’s task. Analysts who had widely expected borrowing costs to be trimmed in the coming months have now largely ruled out that possibility, pushing back their forecasts for any rate reductions. The Bank’s Monetary Policy Committee will be under pressure to keep rates elevated for longer to combat any resurgence in inflation, even if it means slowing economic growth.

For consumers, this means borrowing money, whether for mortgages, personal loans, or credit cards, could remain more expensive than previously thought. On the flip side, savers might find a silver lining, as higher interest rates typically translate into slightly more lucrative returns on savings accounts. However, the spending power of those savings may diminish if the cost of living continues to rise significantly. A prolonged period of higher borrowing costs can also dampen consumer spending and business investment, potentially hitting overall economic growth in the UK. Investor confidence, a crucial factor for economic vitality, is also susceptible to global uncertainty, potentially leading to capital flight or reduced foreign direct investment.

The Price of Fun and Broader Economic Impact

Beyond the essentials, the conflict could also impact the "price of fun" and have broader economic ramifications. The choice of holiday destinations for the spring and summer may become more limited, and flights are likely to get more expensive. Jet fuel prices have already gone up sharply. While airlines often employ hedging strategies to mitigate some of this impact, sustained high aviation fuel costs make it increasingly difficult for them to avoid passing these expenses on through higher fares. Restricted airspaces, increased insurance premiums for airlines operating in certain regions, and shifts in demand could further complicate travel plans and costs.

The wider implications for our finances are highly dependent on how the war – and its global impact – plays out.

• Supply Chain Disruptions: Even if not directly affecting food, global supply chains are fragile. Any disruption to key shipping lanes, such as those through the Middle East, could impact the delivery of manufactured goods, raw materials, and components, leading to shortages and higher prices across various industries.
• Global Trade and Insurance: Increased geopolitical risk translates to higher insurance premiums for shipping, which adds to the cost of imported goods. Some trade routes may become less viable or more expensive, forcing rerouting and increasing transit times.
• Currency Fluctuations: In times of uncertainty, investors often seek safe-haven assets, which can lead to shifts in currency values. A weaker pound against major currencies would make imports more expensive, further fueling inflation.
• Financial Market Volatility: Stock markets tend to react negatively to geopolitical instability, as investor confidence wanes. This can impact pension funds, investments, and overall wealth. Commodity markets, especially oil and gas, will remain highly volatile.
• Business Confidence and Investment: Businesses facing uncertainty are often more reluctant to invest, expand, or hire. This cautious approach could slow economic growth and impact the job market.
• Government Finances: The government may face increased pressure to intervene with support packages for households or businesses, especially if energy prices spiral. This could add to the national debt or necessitate difficult spending choices elsewhere.

In conclusion, the conflict involving Iran introduces a significant layer of uncertainty to the UK’s economic outlook. While the immediate impacts are most visible in fuel and mortgage rates, the potential for wider inflationary pressures, a prolonged period of higher interest rates, and disruptions to global trade and travel are considerable. Households and businesses alike will need to remain vigilant and adapt to an evolving financial landscape shaped by events far beyond their immediate control.