The Bank of England has decided to share how the Iran war will personally ruin your finances, and spoiler alert: it involves higher mortgage payments, pricier energy bills, and a job market that's about as welcoming as a tax audit.
The central bank kept interest rates on hold this week, but its rate-setting committee's report was less about good news and more about preparing for the financial equivalent of a root canal. Not long ago, economists expected rates to fall this year. Then the Iran war happened, and the Bank signaled that rises could come later this year - because nothing says 'stability' like a Middle Eastern conflict.
In the scenario the Bank governor prefers - where energy prices slowly fall - the committee suggests a rate rise or two might be on the menu. In the worst-case scenario, with oil above $120 a barrel for the rest of the year and inflation topping 6% early next year, we could see up to six rate rises, pushing the base rate to 5.5%. That would make borrowing more expensive and savings slightly less pathetic.
For the 87% of homeowners with fixed-rate mortgages - over seven million of them - the pain is delayed until their deal expires, usually in two or five years. The Bank says average monthly payments for those moving to a new deal will rise by about £80 over the next three years. Of course, that's an average, so some will get off easy, and others will need to start selling organs on the black market.
About 53% of UK mortgage holders are expected to see their payments rise, but 25% who fixed at higher rates might actually see a drop - a rare win in this economic dystopia.
Energy bills are also getting a summer glow-up. Ofgem's price cap currently sits at £1,641 for a typical household, but the Bank expects it to rise 'close to £1,900' in July and stay there. The peak won't be as bad as after Russia's invasion of Ukraine, but that's like saying a broken leg is better than a severed one. Nearly 40% of households are on fixed energy tariffs, up from 25% four years ago, so they're shielded until their contracts end. Those on prepayment meters can use less energy in summer, but if prices stay high in winter, well, good luck.
Inflation is accelerating in every scenario, because energy prices push up food costs. The Bank thinks food price inflation could hit 4.6% in September and possibly go higher. Lower-income households will be hit hardest because essentials like food and heat eat up a larger chunk of their income. Some people can use less energy or dip into savings, but the Bank notes that a greater proportion of lower-income households now have less than two weeks of income saved compared to 2022. Borrowing is an option, but that's like fighting a grease fire with gasoline.
Unemployment has been steadily rising, and the Bank warns it could climb further as households save more and spend less. Weaker demand means firms will reduce hiring, especially if they're also facing higher energy costs. Inflation might not feed into wages this year because most 2026 pay settlements are already done, but some committee members noted it could impact 2027 negotiations - so enjoy your current paycheck while it lasts.