Middle East Conflict Set to Push UK Inflation Higher in 2026

The Revised Inflation Forecast

Oxford Economics expects the latest flare-up in the Middle East to push UK inflation higher this year and to complicate the path for interest rate cuts, with significant implications for borrowing costs across the mortgage market.

The consultancy estimates the disruption to energy markets will add about 0.4 percentage points to UK inflation in 2026. Consumer price growth is now projected to average around 2.7% this year, compared with a pre-conflict forecast of 2.3%, keeping inflation above the Bank of England's 2% target for longer.

Higher oil prices, a weaker pound and a temporary jump in wholesale gas prices underpin the revised outlook.

How Energy Prices Hit Households

Oxford Economics assumes that interruptions to shipping through the Strait of Hormuz last for up to two months. On that basis, Brent crude is expected to average just under $80 a barrel in the second quarter — around $15 higher than in the previous forecast — before easing back towards $60 by year-end. European gas prices are assumed to be roughly 30% higher in Q2 than previously forecast.

The impact on UK households will come mainly through regulated energy bills and petrol prices. Because Ofgem adjusts the domestic price cap quarterly with a lag, the rise in wholesale gas prices would not feed through until July. The typical household energy bill could rise by about 13.5% at that point, adding around 0.5 percentage points to CPI inflation.

Edward Allenby, senior UK economist at Oxford Economics, noted: "Higher oil prices will quickly feed through to petrol prices, while a rise in European gas prices will see a sharp increase in household energy bills in July."

Economic Growth Downgraded

Under the revised projections, UK GDP growth for 2026 has been trimmed to 0.8%, with real household incomes expected to stagnate. While Oxford Economics still sees output expanding by 1.3% in 2027, the near-term environment is one of subdued growth, higher-than-target inflation and a degree of economic slack.

Bank of England Rate Cuts Now in Doubt

The energy shock arrives just as markets had been positioning for an imminent easing cycle. Before the conflict escalated, market pricing suggested an 81% probability of a Bank Rate cut in March. By the end of this week, that implied probability had fallen to around 24%, with the chance of an April move reduced to about 61%.

Allenby explained: "If the conflict is short and energy prices quickly fall back, the Monetary Policy Committee will probably resume cutting in either April or June. But if the surge in energy prices persists or expands, the MPC will be set for an extended pause."

The baseline still assumes Bank Rate will be reduced later this year, but at a slower pace — projected to stand at about 3.75% at the end of 2026.

What This Means for Mortgage Borrowers

The combination of stickier inflation and a delayed start to rate cuts suggests that funding costs may stay elevated for longer. Swap rates and gilt yields, which underpin fixed-rate mortgage pricing, are likely to remain sensitive to incoming data on inflation and energy markets.

Several major lenders have already raised fixed rates in response, and more are expected to follow. If you're looking to secure a mortgage, acting sooner rather than later could help you avoid further price increases.

Speak to our advisors about securing your rate →