TRADERS are now betting on 1% of base rate rises in 2026 as the Bank of England seeks to manage the expected inflationary impact of war in the Middle East – as experts said “4.75% will be disastrous” for the UK.
In February, the markets priced in an 86% chance of a 0.25% base rate cut, from the current rate of 3.75%, in March and expected UK interest rates to finish 2026 at 3%.
Then came the Iran war, and everything changed. The latest forecast is that the Bank of England base rate will be increased by a total of 1% in the next nine months to close the year at 4.75%.
Though President Donald Trump has today posted on Truth Social about a total resolution of hostilities in the Middle East, for now the war shows no sign of abating, raising fears of rising inflation.
On Saturday night, Trump gave Iran a 48-hour deadline to reopen the Strait of Hormuz or the US would “obliterate” Iranian power plants.
Experts said this will mean higher mortgage payments, higher petrol prices and higher energy bills for Brits – and the only winners are savers who could see rising interest rates on their cash.
This could trigger another explosion of public spending
Justin Moy, Managing Director at Chelmsford-based EHF Mortgages, said higher rates are coming for the UK.
He added: “If the conflict in the Middle East doesn’t end soon, this could become reality for UK homeowners, as rates will inevitably need to increase to balance inflationary pressures, bringing misery to mortgage holders and businesses, and the economy as a whole.
“With higher mortgage payments, utility bills, and high street spending likely to slow, the only winners are savers – those less affected by higher household costs. The government has a tricky see-saw of fiscal policy to balance now as there is little headroom in the chancellor’s figures, and this could trigger another explosion of public spending.”
Tony Redondo, Founder at Newquay-based Cosmos Currency Exchange, said the “overall outlook is one of stagflation”.
He added: “This will create a ‘double squeeze’ on the UK. For households, the immediate shock hits the mortgage market; roughly 1.8 million homeowners face renewals at rates likely exceeding 5.5%, slashing disposable income by hundreds of pounds monthly.
“While savers benefit from higher returns, persistent energy-driven inflation will erode the real gains. Business confidence faces a ‘liquidity trap’. Higher borrowing costs increase hurdle rates for new projects.
“Small businesses, sensitive to floating-rate debt, will pivot from expansion to survival, pushing unemployment beyond 5.5%. Initially, the Pound may strengthen on higher yields, but the overall outlook is one of stagflation.”
The overall outlook is one of stagflation
Steven Greenall, Mortgage and Protection Advisor at Dunmow-based Protect & Lend, said a rise of 1% would be “disastrous”.
He added: “This is basically a bet on how long the infamous straits of Hormuz are going to be shut for. If the US and Israel ensure safe passage of oil and liquefied natural gas (LNG) tankers, rates could revert to lower levels again as quickly as they went up.
“The UK cannot sustain higher rates with the current state of the economy, 4.75% will be disastrous.”
David Belle, Founder and Trader at Fink Money, blamed Labour for the economic situation.
He added: “The only honest response here is to be incandescent at Rachel Reeves, Keir Starmer and Ed Miliband. Their policies of funding unproductive activity have caused this. We consistently keep seeing the highest monthly borrowing in decades – but the borrowing and deficit expansion is not for growth producing activity.
“The bond market knows this, so traders are acting accordingly. Whether the Bank of England actually raises or not is another story, but the way traders operate will be based upon the sheer fact they are doubting the UK’s growth trajectory combined with this inflationary outlook.
“But the Labour Party will come out and suggest we cannot be held to ransom by the bond market, without understanding it is their policies that cause this reaction.”
It would be a serious blow for borrowers
Craig Fish, Director at London-based Lodestone Mortgages, said 6% mortgages could be around the corner.
He added: “A base rate of 4.75% by year end would be a serious blow for borrowers. Average two-year fixes have already jumped from 4.84% to 5.32% this month and that’s before a single hike. At 4.75%, typical fixes would push well above 6%.
“For the 1.8 million households re-mortgaging in 2026, that’s a painful reversal of fortune. Trackers are only for those who can genuinely afford to gamble. If the conflict drags on, those rates follow the base rate up, fast.
“Most borrowers can’t afford that risk. Lock in a fixed rate if you’re within six months of your deal ending, and keep it under review. Don’t gamble on relief that may never come. Swap rate volatility means deals can vanish within hours. Complacency costs.”
Rohit Kohli, Director at Romsey-based The Mortgage Stop, said this is a blow to the UK.
He added: “A 1% base rate rise would be a serious blow to an economy that’s barely found its footing. Businesses are already contending with higher wages, weaker demand, and a confidence gap that hasn’t fully closed.
“Add rising borrowing costs on top of that and you’re looking at a recession that’s deeper and longer than it needed to be. For homeowners, particularly anyone remortgaging in the next 12 months, rates that looked like they were heading down could head back up fast.”
The next few weeks are crucial
Ben Perks, Managing Director at Stourbridge-based Orchard Financial Advisers, said the Middle East war has turned around a positive start to 2026.
He added: “It’s amazing how quickly things have changed. Just a few weeks ago, base rate was predicted to fall considerably throughout 2026. Now it seems we’re back to square one. But, the Iran War is in its infancy and the economical impact has not yet become apparent.
“The next few weeks are crucial, if they can keep shipping oil from the region across the globe it’ll appease the markets slightly and reduce the likelihood of severe rate hikes this year.”
Riz Malik, Independent Financial Adviser at Southend-on-Sea-based R3 Wealth, called it a “Trump tax”.
He added: “Businesses and households alike will pay the Trump tax if this war continues. A month ago, we were all getting ready for the possibility of base rate cuts and the end of the pain. However, Washington had other plans.”
Photo by Marina Shatskih on Unsplash.
