No changes to interest rates

Lending Outlook Amid Global Turbulence

We have experienced a slow start to the year, with the war in Iran leading to fewer than anticipated new conveyancing instructions and clearly impacting on client confidence, but there is optimism for the rest of this year, with the current situation perhaps not as volatile as is often reported.

We believe that the Bank of England is increasingly likely to keep interest rates unchanged for the remainder of the year as the UK economy faces a combination of weak growth and persistent inflation.

While inflation remains above target, much of the current pressure is being driven by global events rather than excessive consumer demand. The conflict involving Iran and continuing instability around the Strait of Hormuz has significantly increased oil and gas prices globally. Around one fifth of the world’s oil supply passes through the Strait, meaning any disruption immediately impacts energy markets and inflation expectations worldwide.

This is classic cost-push inflation. Higher energy prices feed directly into transport, manufacturing, and household costs across the economy. Unlike demand-led inflation, raising UK interest rates does little to reduce these external pressures. Instead, further rate rises would risk slowing an already fragile economy while having limited impact on inflation itself and would once again lead to a further dampening of the property market.

The Monetary Policy Committee is therefore likely to maintain a “wait and see” approach. Cutting rates too early risks reigniting inflation expectations, while increasing rates further could unnecessarily weaken growth and consumer confidence, all caused by external, uncontrollable international factors.

Fixed-rate mortgage pricing, however, may still fluctuate. Mortgage lenders price fixed products are based largely on long-term gilt yields and future inflation expectations rather than the Bank Rate alone. Recent geopolitical tensions and volatility in global bond markets have made pricing increasingly difficult for lenders, particularly when trying to predict future funding costs. As a result, even if the Bank of England keeps rates unchanged, some movement in fixed mortgage rates is still likely.

The positive news is that conditions could improve quickly if a peace agreement is reached. Oil prices and bond markets have already demonstrated how rapidly sentiment can recover when tensions ease. If stability returns to the Middle East and energy markets normalise, inflation pressures would likely fall sharply, improving both market confidence and the wider economic outlook. Until then, we expect that the Bank of England will prioritise stability by leaving interest rates unchanged.