Impact of the Iran Conflict on UK Finances

The ongoing US-Israel conflict with Iran has already begun influencing household budgets in the UK, from fuel expenses to mortgage costs. The extent of this financial ripple effect depends on how long the war lasts and the speed at which supply chains and economies stabilize. Here are key areas where the impact is being felt.

Rising Fuel Costs

UK motorists have observed a notable increase in fuel prices, with average petrol costs reaching 157.02p per litre—a 24p rise since the conflict began. Diesel prices have surged to 189.42p per litre, up 47p compared to early March. This means filling a 55-litre family car with petrol has cost £13 more, while diesel has risen by £26.

“When lenders take the step of pulling deals rather than simply tweaking pricing, it often indicates that funding costs have moved too quickly for incremental changes to keep pace,” said Adam French, head of consumer finance at Moneyfacts.

Mortgage Rates on the Rise

Before the war, there was optimism about falling mortgage rates, but that has shifted. Lenders are now raising interest rates swiftly, driven by higher funding costs and revised expectations about base borrowing rates. The average two-year fixed rate climbed from 4.83% in early March to 5.89%, hitting its highest level since July 2024. For five-year deals, rates have increased from 4.95% to 5.78%, marking the highest point since November 2023.

Geopolitical tensions have also led to a reduction in available mortgage products, with around 1,500 fewer options on the market. Despite this, over 6,000 deals remain accessible. Analysts note that oil price fluctuations, which can raise pump costs by roughly 7p per litre for every $10 increase, contribute to this trend.

Energy Bills and Price Caps

While households benefit from Ofgem’s energy price cap in England, Wales, and Scotland, this measure is temporary and not universally applicable. Variable deal prices are capped until July, though recent data shows a drop in energy costs at the start of April. The situation from late May onward will determine summer bill amounts.

Energy consultancy Cornwall Insight forecasts that dual-fuel households could pay £1,871 annually under the July-to-September price cap, up from the current £1,641. A prolonged period of elevated wholesale energy prices might lead to sharp increases for millions. If past events are any indication, such as the government’s Energy Price Guarantee after the pandemic and Russia’s invasion of Ukraine, targeted support may be introduced if needed.

Experts caution that rising fuel costs can indirectly affect everyday goods and services, as higher transport expenses might be passed on to consumers. Meanwhile, energy providers are adjusting tariffs, with some removing deals or increasing prices amid uncertainty. The interplay of these factors will shape financial pressures in the coming months.