Oil's reach extends far beyond the forecourt, with brokers already watching swap rates and preparing clients ahead of the 5 November rate decision
Diesel crossed £2 a litre for the first time on Friday, with the RAC confirming an average price of 200.01p – a 40.5% rise since late February when disruption to oil and gas shipments through the Strait of Hormuz began pushing fuel costs to record levels.
Filling a family car now costs £110 on average, nearly £32 more than before the conflict began. Petrol has also climbed, averaging 174.71p a litre and adding £23 to a full tank.
Simon Williams, head of policy at the RAC, said the threshold had arrived with no sign of reversing. "This is a pump price threshold that no-one wanted to cross – the average price of a litre of diesel has risen to a record 200.01p and is showing no signs of slowing, heaping more misery onto motorists. The cost of filling up an average family car is now £110, almost £32 more than it was at the start of the US/Iran war. In a cruel twist, it's diesel vehicles, which were once considered the most cost-effective option for lengthy journeys, that are now burning a hole in people's pockets."
The record price lands at a sensitive moment for the mortgage market. The Bank of England's Monetary Policy Committee (MPC) meets on 5 November, with the base rate currently sitting at 3.75% and Consumer Prices Index (CPI) inflation at 3.1% as of August. Before the conflict began, rate cuts were widely expected before the end of the year. Sustained energy-driven inflation could change that calculation, and brokers are already adjusting their conversations with clients accordingly.
Louis Mason (pictured top), director at Oportfolio, told Mortgage Introducer the inflationary risk is the one that matters most. "The concern isn't simply that petrol becomes more expensive," he said. "Oil has tentacles throughout the economy, from transport and manufacturing to food and household bills. The longer prices remain elevated, the greater the chance that what begins as an energy shock starts appearing in prices elsewhere. That's when it becomes much more uncomfortable for the Bank. A short-lived spike can potentially be looked through – persistent inflation spreading through the economy is much harder to ignore."
From the forecourt to swap rates
Mortgage rates do not wait for the MPC to act. Lenders price fixed-rate products largely against swap rates – financial market instruments that reflect where traders expect interest rates to go – and those rates have already begun moving in response to the inflationary pressure building since February.
That pressure is visible in the bond market too. Thirty-year gilt yields broke 6% for the first time since 1998 this week, with five-year yields – the benchmark most directly linked to fixed mortgage pricing – at levels last seen in 2008. Swap rates had already risen sharply in response, with two-year swaps moving from 4.25% to 4.59% in a single month. Lenders cannot absorb that kind of movement indefinitely.
Mason said the mortgage market is already pricing in what the MPC has yet to decide. "Mortgage rates don't wait politely for the Bank of England to make its next decision," he said. "Lenders price fixed mortgages largely around financial-market expectations, so when markets become more concerned about inflation and future interest rates, borrowing costs can move well before the MPC meets. November might be circled on everyone's calendar, but the mortgage market is already having the conversation."
It is a dynamic brokers have seen before. Lender repricing linked to rising swap rates move rapidly and without formal rate decisions triggering them, and the current environment – with energy costs feeding into broader price pressures – has echoes of earlier repricing cycles.
Who is most exposed?
Not all borrowers face equal exposure. Mason highlighted a group already under pressure – those coming off cheap fixed rates arranged when the base rate sat near historic lows.
"I'd be particularly conscious of borrowers coming off very cheap fixed rates over the coming months, especially those with larger mortgages or tighter monthly affordability," he said. "A movement of 0.25% can sound insignificant when discussed in economic terms, but on a substantial mortgage it translates into real money leaving a household every month. That's where percentages on a screen become household budgeting decisions."
Around 1.8 million fixed-rate deals are due to expire this year, according to UK Finance, many of them taken out when rates were considerably lower. The margin for error is narrower if rates move higher rather than lower before those clients complete.
What should brokers be doing now?
Mason's advice is clear. The worst outcome for clients approaching the end of a fixed deal is inaction in the hope that November's MPC meeting brings relief.
"The worst strategy is probably to sit on your hands and gamble everything on November," he said. "We would rather start the conversation early, understand what is available and potentially secure an option. Depending on the lender and circumstances, there may then be scope to review things if pricing improves before completion. It's about giving yourself options rather than trying to predict the Bank of England better than the financial markets."
On the broader question of how long the current situation needs to persist before it becomes a serious problem, Mason said the duration of elevated energy prices matters more than their peak.
"Persistence matters more than the headline oil price on any particular day," he said. "If energy prices fall back relatively quickly, some of the inflationary concern could unwind with them. The bigger danger is if expensive energy becomes the new normal and starts feeding into wages, goods, and services more broadly. At that point, we're no longer talking about an oil-price problem; we're talking about an inflation problem. The mortgage market can cope with expensive money. What it struggles with much more is unpredictable money."
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