Fixed mortgage rates are hitting multi-year highs in Britain even as the Bank of England held its base rate at 3.75% on Thursday, with financial markets pricing in the prospect of future rate hikes triggered by the energy price shock from the Iran war. Five-year fixed mortgage deals have climbed to their highest levels since early 2025, according to analysts, as the changed monetary outlook begins to feed through to the products available to UK homeowners. The Bank’s unanimous hold decision did little to arrest that trend.
The upward pressure on mortgage rates stems from the market expectation that the Bank will be forced to raise its base rate in response to rising inflation caused by the Iran war. The US-Israel conflict against Iran has pushed global energy prices sharply higher, threatening to push UK inflation above 3% and requiring a policy response. The Bank now projects inflation rising to approximately 3.5% in March and remaining above target throughout 2026.
Governor Andrew Bailey acknowledged the pressure on UK households but said the Bank’s primary responsibility was to ensure that inflation returned to the 2% target. He warned that rising petrol prices and the potential for higher energy bills represented a real financial challenge for many families. His message was that the Bank was monitoring the situation carefully and stood ready to act if the inflation outlook worsened materially.
Financial markets moved further in the hawkish direction following the Bank’s announcement. UK gilt yields rose, the FTSE 100 fell, and the pound strengthened against the dollar. Traders are now pricing in a June rate hike, which would add further upward pressure to already elevated mortgage rates. Analysts said the combination of rising energy costs and higher mortgage rates posed a significant threat to household finances.
The research director at trading platform XTB described rising mortgage rates as damaging to Labour’s growth strategy. Five-year fixed rates at multi-year highs represent a meaningful additional cost for the millions of homeowners whose fixed deals will expire this year. The government faces increasing pressure to explain how it intends to protect household finances against the dual threat of higher energy and mortgage costs.