Soaring oil prices put Bank of England in inflation dilemma

The war in the Middle East has entered a second week, triggering renewed concern over the economic fallout in the UK, particularly the impact of rising energy prices on inflation and interest rates.

In an analysis published by The Independent, the newspaper examines how escalating geopolitical tensions could influence the trajectory of interest rates set by the Bank of England (BoE) — and what that may mean for mortgages and savings.

Interest rates were cut four times in 2025, bringing the BoE’s base rate down from 5.25 per cent to 3.75 per cent. The reductions provided relief to mortgage holders, particularly those renewing deals agreed at higher rates in 2023. Markets had anticipated further easing, with some analysts forecasting up to three cuts in 2026 that could have reduced the base rate to 3 per cent — a level last seen in December 2022.

However, those expectations have shifted sharply in recent days. Rising oil and gas prices, driven by instability in the Middle East, have heightened fears of another inflationary shock. Higher energy costs could feed into food prices, transport expenses and broader goods inflation, potentially forcing policymakers to reconsider the pace of monetary easing.

According to The Independent, Oxford Economics now expects the BoE’s Monetary Policy Committee (MPC) to hold rates steady at its 19 March meeting, while UBS predicts any potential cut could be delayed until April at the earliest. Even then, uncertainty remains high.

Thomas Pugh, chief economist at RSM UK, told The Independent that market sentiment has turned decisively.

“The markets have gone from a nailed-on rate cut to virtually no chance,” Mr Pugh said. “Even if they come to a deal this week I still don’t think you get a rate cut - there’s too much volatility at the moment."

“Normally the BoE can ignore one-off shocks because it falls out of the [inflation] cycle in a year’s time. That was expected at the start of the Russia crisis and that turned out to be the wrong policy. With inflation having been above-target for five years or so and looking unanchored, they just don’t have the luxury of sitting back and looking through it.”

Mortgage markets have already begun responding. As The Independent reports, some major lenders have increased fixed-rate mortgage products by between 0.1 and 0.25 percentage points, reflecting movements in swap rates that anticipate future base rate decisions. Although the changes remain modest, they mark a shift from the steady easing seen earlier this year.

The UK housing market, which has shown tentative signs of recovery, could face renewed pressure if borrowing costs climb again. Halifax data showed house prices rose 0.3 per cent in February to an average of just over £301,000, supported in part by lower mortgage rates and increased first-time buyer activity.

For savers, however, higher rates can offer some benefit. Easy-access savings accounts have offered returns of up to 4.5 per cent, and competition among providers appears to be intensifying. With the April 5 ISA deadline approaching, savers may look to maximise tax-free allowances amid continued uncertainty.

While a March rate hold now appears increasingly likely, the longer-term direction of UK interest rates will depend heavily on whether energy-driven inflation proves temporary — or marks the beginning of another sustained economic shock.

By Sabina Mammadli