UK Economy Under Pressure as Middle East Conflict Drives Oil Surge and Rate Rise Fears
The UK economy is facing significant headwinds in April 2026 as the ongoing Middle East conflict continues to drive up oil prices, fuel inflation expectations, and raise the prospect of an interest rate rise — a dramatic reversal from earlier forecasts of cuts.
Background
Before the US-Iran conflict escalated in late February 2026, markets had anticipated two Bank of England rate cuts during the year. The closure of the Strait of Hormuz by Iran — a critical chokepoint for approximately one-fifth of global energy exports — sent oil prices surging from just over $70 per barrel in February to over $100 in March, with knock-on effects across the UK economy.
Key Developments
The Bank of England's Monetary Policy Committee held its Bank Rate at 3.75% at its March 2026 meeting, a unanimous decision. However, the MPC's minutes struck a notably hawkish tone, and markets have now completely reversed their earlier expectations of rate cuts, instead pricing in a possible rate rise by July 2026. The next interest rate decision is scheduled for 30 April 2026.
The RAC reported a record monthly rise in petrol and diesel costs in March, and analysts estimate the energy price cap could rise by £288 by July due to supply shocks. Households' inflation expectations have risen sharply, with the YouGov/Citi survey reporting year-ahead expectations at 5.4% in March — reversing a previous downward trend. The Bank of England now forecasts CPI inflation to be between 3% and 3.5% in Q2 and Q3 2026, significantly higher than its pre-conflict forecast of around 2.1%.
Business confidence has deteriorated markedly. The ONS Business Insights survey reveals that 64% of businesses are concerned about supply chain disruptions in the next 12 months. Manufacturing input costs surged to their highest level since late 2022, with firms planning to pass these costs on to consumers. The Institute of Directors reported a significant deterioration in business confidence.
Mortgage and Housing Market Impact
Higher mortgage costs are a growing concern, particularly for the approximately 1.8 million households due to refinance in 2026. Average rates on a five-year fixed-rate mortgage have increased by over 60 basis points compared to the end of February, as lenders factor in higher risk through swap rates. The government's spring statement in April offered no new policy announcements, with GDP growth and inflation both downgraded.
Why It Matters
For UK households already squeezed by years of high inflation, the prospect of rising interest rates and higher energy bills represents a significant additional burden. The minimum wage rose by 4% to £12.71 per hour in April 2026, but this comes amid rising unemployment and increased costs for small businesses. The collapse of the Islamabad peace talks between the US and Iran on 12 April has done nothing to ease market anxieties.
What's Next
All eyes are on the Bank of England's 30 April decision. JP Morgan predicts one rate rise by June 2026, while Oxford Economics anticipates a hold at 3.75% for the full year. The outcome will depend heavily on whether the fragile US-Iran ceasefire holds and whether oil prices stabilise.
Source: UK Finance Monthly Economic Review, Bank of England Rate Analysis
