Oil price pressures and a divided MPC leave mortgage brokers facing a prolonged wait for rate relief
UK mortgage rates have risen faster since the outbreak of the Iran conflict than in almost any other major economy, Bank of England governor Andrew Bailey told MPs on Tuesday, as he insisted the central bank holds no predetermined path for interest rates.
Appearing before the Treasury Select Committee in Westminster, Bailey pushed back against suggestions that his public statements amount to firm commitments on borrowing costs. Every signal from the Bank, he stressed, is conditional on how the economy evolves, and the world remains far too uncertain for unconditional pledges.
The governor said he sometimes finds it frustrating that his remarks are interpreted as fixed positions. Monetary policy decisions are made meeting by meeting, dependent on incoming data, and right now, with oil prices approaching $100 a barrel and the Iran conflict showing no sign of resolution, that data is shifting fast.
UK borrowers bearing the biggest burden
Bailey used the hearing to place Britain's mortgage market in stark international context. He told the committee that residential mortgage rates in the UK have climbed by around 75 basis points – three quarters of a percentage point – since hostilities between the US and Iran began in late February. With the possible exception of Japan, he said, that is the largest increase anywhere in the G7.
For brokers managing remortgage conversations, that figure underscores the scale of the challenge facing clients coming off fixed-rate deals struck before the energy shock took hold. The trend has been building for months, with fixed-rate mortgage pricing coming under sustained pressure as gilt yields climbed to 25-year highs – a pattern Bailey's remarks did nothing to reverse.
Bailey also warned that energy prices could rise further still. He pointed to ongoing Houthi attacks in the Red Sea area, through which a key Saudi pipeline runs, and highlighted that a widening of the so-called crack spread – the gap between crude oil prices and the refined products derived from it – has been compounded by Ukraine's successful targeting of Russian refining capacity, adding another layer of pressure to global fuel markets.
What does this mean for the Bank Rate?
The Bank Rate has been held at 3.75% since last December, when it was last cut – a run of five consecutive holds as the Iran conflict upended expectations of a continued easing cycle. Before the war broke out, markets were pricing in two or three further reductions this year. Those expectations have been unwound entirely.
External member Alan Taylor made this point explicitly at the hearing, arguing that the Bank has effectively already tightened policy even without moving the Bank Rate. By withdrawing the expectation of cuts, he said, the MPC has applied more restrictive conditions than it would otherwise have done – an active decision to maintain restraint rather than a passive one.
That view sits in contrast to that of external member Megan Greene, who argued at the hearing that the length of time oil prices have remained elevated is a serious concern. She warned of second-round effects, where sustained energy costs feed into wages, which then push broader prices higher, and said she believes it was better to act now and adjust course if the inflation threat proved smaller than feared, rather than wait and risk falling behind. Greene voted for a rate rise at the last MPC meeting.
Deputy governor Dave Ramsden took a different position, pointing to wage growth coming in below the Bank's own forecasts this year. He framed the global inflation picture, rather than domestic conditions, as the primary risk, and said that was consistent with his decision to vote for a hold. Brokers seeking to understand how swap rates drive fixed-rate mortgage pricing will recognise that the division within the MPC is itself a source of market uncertainty, making it harder for lenders to price with confidence.
Gilt markets add to the pressure
The Treasury Select Committee hearing took place on the same morning the UK's Debt Management Office (DMO) sold £4.25 billion of 30-year government bonds at a yield of 5.8168% - the highest borrowing cost for gilts of that duration since the DMO was established in 1998, according to Reuters. The comparable sale in May 2025 was struck at a yield of 5.4047%.
Higher gilt yields feed directly into the swap rates that lenders use to price fixed-rate products. When long-term government borrowing costs rise, mortgage rates tend to follow. The bond market sell-off that preceded Monday's auction had already pushed 30-year yields to their highest level since 1998, piling further pressure on a market in which rate relief has been repeatedly deferred.
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