UK interest rates held back by Middle East conflict, economists warn
UK interest rates could already be falling — if not for the war spreading across the Middle East. That’s the growing consensus among economists and Bank of England watchers, who say geopolitical instability is injecting just enough inflationary uncertainty to keep policymakers frozen in place.
The one obstacle standing in the way
Inflation in the UK has cooled sharply over the past year, dropping from a peak of 11.1% in October 2022 to around 3.2% as of the latest figures. Wage growth is easing. Consumer spending remains subdued. On almost every domestic measure, the conditions for a rate cut are quietly assembling themselves. But the Middle East is throwing a wrench in the works.
Escalating conflict involving Iran, Israel, and now broader regional players has pushed oil prices higher and created what analysts describe as a “fog of uncertainty” over global supply chains. That fog makes it genuinely difficult for the Bank of England’s Monetary Policy Committee to justify moving rates down from their current 5.25% level — the highest in 16 years.
Energy prices are the wildcard
It all comes back to energy. Oil markets are notoriously sensitive to Middle East disruption, and even the threat of wider conflict has been enough to keep Brent crude prices elevated above $90 per barrel for stretches in recent months. Higher energy costs feed directly into UK inflation, complicating the picture just when it seemed to be clearing.
“The domestic fundamentals would, in normal circumstances, support a move toward easing,” said one senior economic adviser familiar with the MPC’s thinking. “The external environment is making that conversation much harder.”
So the committee waits. And British mortgage holders, businesses, and borrowers wait with it.
What markets are pricing in
Financial markets had, until recently, been betting on as many as five or six rate cuts through 2024. Those expectations have been trimmed significantly. Many traders now expect just two cuts this year, potentially beginning no earlier than August — and only if the geopolitical situation stabilises enough to give the Bank cover to act.
The pound has held relatively steady against the dollar, suggesting markets haven’t completely abandoned hope of a rate reduction this year. But the window is narrowing with each passing week of conflict.
The human cost of delay
For ordinary borrowers, the delay is painful in very concrete terms. Around 1.6 million UK homeowners are due to remortgage in 2024, many of them rolling off historically cheap fixed-rate deals struck two or three years ago. A typical family moving from a 2% fix onto a 5%-plus rate faces hundreds of pounds more per month.
Still, the Bank won’t be rushed. Its primary mandate is price stability, and officials have made clear they’d rather cut too late than too soon and watch inflation rebound.
Whether the Middle East situation eases enough to give the MPC its opening remains the single biggest question hanging over the UK economy right now — and there’s no clean answer on the horizon.
