Iran war is having a dramatic effect on the UK economy

When news first broke about the war in Iran, not many people would have predicted the chain effect that it would have on UK mortgage markets and the UK economy as a whole.

Prior to the start of the war, experts had predicted that the Bank of England was set to reduce the base rate, with the inflation target looking like it would be achieved. Instead, the Bank of England held rates, with the Bank’s forecasters predicting that inflation could reach 3.5%¹ in the following months as a consequence of the Iran war.

The inflation forecast is linked to the soaring gas prices that are now a global concern. One of the missile strikes hit a major gas facility and another targeted an Iranian oil field. In addition, the disruption to the Strait of Hormuz is affecting gas and oil supplies.

In the UK, petrol prices have rapidly surged and as gas prices are passed on to households, it became quickly apparent that the inflation rate target of 2% would not be met. When inflation rates rise, this generally drives mortgage rate increases.

However, the Bank of England governor has provided some assurance that although inflation rates are likely to rise, the energy shock that occurred when Russia invaded Ukraine in 2022 would not see a repeat.

The severity of the conflict is being closely monitored before any major decisions will be made around interest rates. It is a case of waiting to see what happens next, with the chancellor calling for de-escalation.

What this means for homebuyers and re-mortgagers

For those who were looking to get onto the property market in 2026, there was a lot of optimism that rates would come down. With affordability challenges to contend with, there were many people waiting to see if rates started to fall, to boost their mortgage affordability.

The decision to hold the base rate and the uncertainty around how much inflation will rise has already been reflected in the current mortgage market. Some buyers have seen mortgage offers removed and this has been the scenario for some re-mortgagers too.

Households will feel the financial impact of the war across energy bills and fuel bills too, so it is not just mortgage applicants who stand to be affected.

Some lenders have pulled deals off the market and with conflict still ongoing, lenders are expected to maintain a cautious approach. The Bank of England meets at the end of April, and the war situation will have a significant impact on the rate decision, so it is very much a waiting game right now.

Sources:

1 https://www.bbc.co.uk/news/articles/c33lnd1gxxro

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April 2026