The war in Iran is affecting the cost of living around the world. In the UK, it is leading to higher energy prices, weaker economic growth and a more expensive future.
Author
- Alper Kara
Head of Department of Economics, Finance & Accounting, Brunel University of London
It may seem odd that fighting in the Middle East could have such a profound affect on household finances in the East Midlands (and everywhere else in the UK). But since the conflict began on February 28 2026, banks and building societies have withdrawn over 1,500 mortgage products from the UK market.
For many borrowers, especially first-time buyers and those coming off fixed-rate deals, the prospect of cheaper borrowing has quickly faded.
Mortgage rates have started to rise again , with two-year fixed rates increasing from around 4.8% to about 5.5%. For a borrower with a £200,000 mortgage over 25 years , this would mean an increase of £90 in monthly payments, adding close to £1,000 a year to household costs.
So how exactly does a war in the Middle East feed through to the cost of borrowing in the UK?
The biggest effect comes from energy. The conflict is directly affecting oil production in a region that accounts for roughly one-third of the world's supply (and 20% of its liquid natural gas).
Energy costs affect almost everything, from transport and food to manufacturing and building materials - not to mention household heating and electricity bills.
But the impact is not limited to energy prices. The Iran war has also disrupted global fertiliser supplies , with prices rising sharply due to supply bottlenecks in the Middle East - a major global hub of fertiliser production and exports. Higher fertiliser prices increase the cost of producing food.
As a result of these kinds of rising costs, UK inflation is now expected to reach around 4% this year , up from a previous estimate of 2.5%.
This is a big problem for the Bank of England, which wants to keep the rate of inflation under control at around 2% . When energy prices rise and push inflation higher, the Bank is less able to cut interest rates. It may even have to increase them.
Another problem for borrowers in the UK is the effect on government bond markets.
UK government bonds (commonly known as "gilts") are a form of government debt. Investors effectively lend money to the government, which pays it back with interest (the yield). Because these yields act as a benchmark for borrowing costs across the financial system, an increase in gilt yields raises commercial banks' funding costs, which are then passed on through higher mortgage rates.
In recent weeks, UK gilt yields have climbed sharply as investors have revised up their expectations for inflation and interest rates.
For the Bank of England, rising gilt yields signal that financial conditions are tightening and inflation risks may be building, making it less likely that interest rates will be cut any time soon.
Before the conflict, financial markets were expecting a gradual decline in interest rates during 2026. Now, they are pricing in an increase in the Bank's base rate by the end of 2026.
For mortgage borrowers, this shift is critical. When banks and other lenders set their mortgage rates, they take into account where they expect interest rates to be in the future.
UK vulnerability
While these global economic forces are affecting many countries, the UK is particularly exposed - in part because its economy was already growing very slowly .
The UK is also heavily exposed to global energy markets. It imports around 44% of its energy , particularly natural gas, making it more vulnerable to global price shocks. So, when international energy prices rise, the impact feeds through more quickly into domestic inflation.
This effect is less pronounced in more energy self-sufficient economies such as the US and Norway, which are major energy producers. In contrast, expectations of UK economic growth have been downgraded sharply , reflecting both its reliance on energy imports and underlying economic fragility.
For many households, the combined effect is significant. If financial markets expect the Bank of England to raise interest rates further, mortgage rates are also likely to increase, as lenders price in these expectations when setting new deals.
On top of that, a weaker economy will also affect incomes. Even before the Iran war, slower economic growth was feeding through into slower wage rises , with signs of declining employment and reduced business activity . The Iran war is likely to intensify these pressures further.
Looking ahead, UK households are likely to face an unsettling combination of higher mortgage costs, weaker income growth and reduced job opportunities. At the same time, they continue to face persistent cost-of-living pressures from increasing energy and food prices.
Together, these pressures are likely to result in a sustained squeeze on disposable income. There is growing expectation that the energy crisis will last for some time. But even if the conflict ends tomorrow, its economic impact will persist.
Alper Kara does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
