Oil prices have surged past $100 per barrel for the first time since the outbreak of the Ukraine conflict, driven by escalating tensions in the Middle East following US-Israeli military strikes on Iran. This sharp movement in crude markets is now reverberating through the UK economy, creating a cascade of concerns for consumers, policymakers, and financial markets alike.
Petrol prices have climbed nearly 5p per litre to 137.5p since military operations commenced, whilst diesel has risen almost 9p to 151p per litre, according to data from the RAC. Industry analysts predict further deterioration; Simon Williams, head of policy at the RAC, anticipates unleaded will reach an average of 140p within the coming week, with diesel likely climbing to at least 160p per litre. Edmund King, president of the AA, has warned drivers to expect gradual increases at the pump as supply concerns persist.
The motoring organisations have encouraged drivers to adopt fuel-conserving practices rather than panic-purchasing at forecourts. The RAC recommends avoiding harsh acceleration and braking, ensuring tyre pressures are correctly maintained, and shopping strategically for the best available prices. The AA suggests that drivers consider eliminating non-essential journeys whilst capitalising on seasonal weather improvements to extend fuel efficiency.
The geopolitical dimension adds considerable weight to market anxieties. Shipping through the Strait of Hormuz, which handles approximately one-fifth of global oil and gas exports, has largely ceased. Jordan Rochester, an executive director at Mizuho Bank, characterises the current situation as potentially the largest energy supply and logistics crisis in modern history, particularly given the appointment of Mojtaba Khamenei as Iran’s new supreme leader and the apparent entrenchment of hardline positions within the Iranian regime.
Financial markets are pricing in significant domestic consequences. Interest rate derivatives now reflect a 75 per cent probability that the Bank of England will raise base rates from 3.75 per cent to 4 per cent by year-end, as central bank officials confront renewed inflationary pressures. This anticipated tightening has immediate implications for borrowers; mortgage rate swap pricing has jumped sharply since the conflict erupted, signalling that major lenders will likely increase rates this week. David Hollingworth of broker L&C Mortgages describes a “snowball effect” scenario wherein competitive pressures compel rapid rate increases across the sector.
The broader fiscal picture has deteriorated correspondingly. Government short-term borrowing costs have climbed to their highest level in nearly a year, with two-year gilt yields now exceeding 4 per cent compared to 3.525 per cent at the end of February. This reversal erases several months of declining interest rate expectations. UK Finance projections suggest 1.8 million households will require remortgaging during 2026 alone, placing millions of borrowers at the mercy of an increasingly unfavourable interest rate environment.
Chancellor Rachel Reeves will participate in a G7 finance ministers’ conference call to discuss potential interventions, including possible releases from global crude reserves designed to mitigate supply pressures. The Government faces growing pressure from the Conservative opposition, which is pursuing parliamentary action against planned fuel duty increases scheduled for later this year.
The unfolding situation presents an acute policy dilemma for the Bank of England. Imported inflation from energy costs must be balanced against the broader economic impact of rate rises on an already fragile mortgage market. For investors, the volatility in commodity and fixed-income markets suggests significantly elevated risk premiums across multiple asset classes in the months ahead.
