Interest charges ‘to climb above 4%’:  Soaring vitality costs gasoline fears of contemporary inflation shock

Borrowers were last night warned they face higher mortgage costs on top of soaring energy bills as war rages in the Middle East.

Experts said interest rates could rise back above 4 per cent to deal with an inflation shock triggered by a surge in oil and gas prices.

That would come as a bitter blow to millions of families also facing a possible £500 rise in energy bills and higher prices at the pumps.

As conflict in the Middle East pushes up the cost of oil and gas, the Institute for Fiscal Studies (IFS) said that the crisis could have ‘far-reaching’ economic consequences.

The National Institute of Economic and Social Research (NIESR) said this could include interest rates rising past 4 per cent, which would make mortgages more expensive for millions of people.

Banks and building societies are already ditching plans to cut mortgage rates as the conflict fuels fears of a renewed cost-of-living crisis driven by soaring energy bills.

War report: Experts said interest rates could rise back above 4% to deal with an inflation shock triggered by a surge in oil and gas prices

Borrowing and savings specialists Moneyfacts said ‘several lenders have pushed pause on planned rate cuts in response to the conflict in the Middle East and its potential economic repercussions’.

The price of crude oil topped $85 a barrel for the first time since July 2024 this week while gas prices have almost doubled as Iran targets major energy installations in the region and blocks supplies through the Strait of Hormuz.

Analysts at Cornwall Insight said the energy price cap is on course to rise by £160 to £1,801 in July – more than offsetting the £117 cut coming in April, which was announced by regulators before the US-led strikes on Iran.

The Resolution Foundation went even further, saying the turmoil could add £500 to a typical bill and one percentage point to inflation.

Ruth Curtice, chief executive at the thinktank, said: ‘If increases to oil and gas prices are sustained, we could see inflation back at 3 per cent by the summer.’

The Bank of England, led by Governor Andrew Bailey ( pictured ), has cut rates six times since August 2024

The threat of a new inflation shock has shattered hopes of interest rate cuts. 

The Bank of England, led by Governor Andrew Bailey, has cut rates six times since August 2024 – from 5.25 per cent to 3.75 per cent.

But the chances of another reduction later this month have tumbled from around 80 per cent last week to just 20 per cent.

And NIESR said the next move may in fact be up. It said a ‘persistent shock to energy prices may force the Bank of England to raise rates back above 4 per cent’.

IFS director Helen Miller said: ‘If war in the Middle East drags on that will be unambiguously bad news for all of us, including the Chancellor. 

On the economic front, higher oil and gas prices and more economic uncertainty would drag on economic growth.

‘Disposable incomes would fall as inflation rises. Higher inflation would likely mean higher interest rates. We should all hope that we are not facing a protracted conflict.’

The changing outlook for interest rates has fed through to so-called swap rates, which fixed mortgage deals are priced on, and lenders are now responding by abandoning plans for further cuts to the price of home loans.

Adam French, head of consumer finance at Moneyfacts, said: ‘The impact is almost instantaneous. Some lenders have already paused or reconsidered planned rate reductions.’

And Samuel Mather-Holgate, of financial planner Mather & Murray Financial, said: ‘The downward trajectory of swap rates is no more. 

‘On the back of events unfolding in the Middle East, there’s every chance mortgage rates will rise again.’