Iran's threat to fully close the Strait of Hormuz has ended ceasefire talks, piling pressure on rates and Bank of England policy
Iran has threatened to completely close the Strait of Hormuz after pulling out of ceasefire negotiations with the United States — a development that threatens to reverse weeks of modest oil price relief and push UK mortgage rates higher once more.
Iran's state-affiliated news outlet Tasnim reported that Iranian negotiators would stop exchanging messages with the US through intermediaries and that Tehran and its allies had resolved to completely block the Strait of Hormuz, and activate additional fronts including the Bab al-Mandeb Strait, in order to punish what Iran described as continued aggression by Israel and its supporters.
The announcement came as fresh military exchanges marked the collapse of the fragile ceasefire. The United States bombed Iranian radar and drone control sites inside Iran after Tehran shot down an American MQ-1 Predator drone at the weekend, while Kuwait simultaneously reported it was intercepting incoming drone and missile fire.
US Central Command confirmed that American forces had intercepted two Iranian ballistic missiles targeting bases in Kuwait at 11pm Sunday, with no personnel harmed.
The Strait’s closure could have big implications for the UK mortgage market and would almost certainly reverse the oil price declines that had offered some hope of a rate-cutting cycle resuming at the Bank of England.
How oil feeds directly into mortgage rates
Brent crude had fallen roughly 19% through May 2026 — its worst monthly performance since the Covid-19 pandemic — as investors priced in the prospect of a lasting ceasefire deal. Iran's decision to walk away from talks, and its explicit threat to seal the Strait entirely, erases much of the basis for that optimism.
Higher interest rate expectations have led to a rise in wholesale borrowing costs for mortgage lenders as swap rates increase, causing building society and bank-offered mortgage rates to rise swiftly.
That dynamic has already inflicted significant damage on borrowers. The average two-year fixed mortgage rate rose from 4.83% at the start of March 2026 to 5.67% by early May, according to data from Moneyfacts, with the five-year fixed equivalent moving from 4.95% to 5.69% over the same period.
The shift in sentiment has been striking. A poll of UK brokers published by Mortgage Introducer found the majority now expected rate hikes rather than cuts before year-end. Financial markets have since shifted from pricing in rate cuts to pricing in between two and three quarter-point increases, which would push five-year fixes towards 6%. Monday's breakdown hardens that outlook further.
Bank of England caught in an impossible position
UK Consumer Prices Index inflation stood at 3.3% in the 12 months to March 2026 — above the Bank's 2% target — and on 30 April 2026, the Monetary Policy Committee voted eight to one to hold the base rate at 3.75%, with one member already voting to increase it to 4%. The next MPC decision falls on 18 June 2026.
The conflict has created a cost-push inflation shock in which prices rise not because demand is strong but because production has become more expensive — a scenario in which raising rates to combat inflation risks deepening an economic slowdown simultaneously. A complete Hormuz closure would intensify that dilemma. When the MPC held rates at 3.75% in April 2026, it flagged inflation staying above target for the remainder of the year.
Markets now expect the base rate to rise — potentially multiple times — to as high as 5.25% by the end of 2026, a big reversal from earlier expectations of several cuts.
The best-case scenario — oil falling back to $70–75 per barrel and the Bank of England cutting rates in Q2 or Q3 2026, pulling two-year fixed rates back towards 4.5–4.75% — now looks significantly less likely.
Goldman Sachs had already raised its Brent crude forecast to $90 per barrel by late 2026, citing record inventory drawdowns of 11 to 12 million barrels per day. A complete closure of the Strait would push that forecast considerably higher.
