UK interest rate cuts unlikely this year amid Iran war – and a rise could be ahead
UK interest rates are not expected to be cut this year and could even rise next summer, according to financial markets, in a dramatic reversal of forecasts before the US-Israel war on Iran.Markets data on Monday showed that investors predict the Bank of England will most likely keep its base rate on hold at 3.75% for the remainder of the year, and would raise them to 4% next June.Before the Iran war began, a rate cut at the Bank’s next meeting on 19 March had been an 80% chance, but policymakers are now expected to wait to see how the conflict develops, with a 99% probability of a hold at the meeting and no rate cuts for the rest of 2026, markets indicate.Statements from the Iranian leadership and Donald Trump at the weekend showed both sides in the conflict were prepared to fight for several more months, leading financial markets to register sharp falls.
UK two-year bond yields rose to 4.129%, which was up from 3.52% in the days before the conflict started and the highest since April 2025.The yield, which is a proxy for the interest rate, on two-year government bonds was on course for the biggest one-day increase since Liz Truss’s mini-budget in 2022, Reuters reported.Truss’s plans for unfunded tax cuts and energy bill support prompted a rise in bond yields and sent the pound down to a record low.
The potential interest rate rise raises the prospect of higher mortgage rates for longer for UK homeowners.UK mortgage lenders began to increase the interest rate on home loans in a further blow to the living standards of hard-pressed households.On Monday, data from Moneyfacts showed the average two-year fixed residential mortgage rate was 4.87%, up from 4.84% on Friday, while the average five-year fix was 4.
98%, up from 4,96%,European stock markets slumped after opening on Monday,The UK’s FTSE 100 was down 200 points or 1,9% at 10,087 points before recovering to 10,170 at 10am.
Germany’s Dax also regained some lost ground after dropping 548 points or 2.3% at 23,043 points in early trading, while the Paris CAC fell by the largest percentage – down 2.5%.Chris Beauchamp, the chief market analyst at IG, said stock markets had woken up to the implications of the Iran war, which has left the strait of Hormuz, through which about 20% of the world’s oil supply travels, in effect closed, potentially for a long period.Brent crude hit $119 (£89) a barrel on Sunday night before falling back to $104 after it was announced that G7 finance ministers would meet on Monday online to discuss opening emergency oil reserves.
Beauchamp said: “Having remained remarkably complacent last week, it looks like the rush for the exits has begun in earnest,“Even high-flying defence stocks are being hit hard in London today, a sign that investors are no longer concerned about potential upside, but instead are focusing on protecting their profits, opting to sell now and sit out the volatility for the time being,”Investors fear that rising oil prices will push up inflation in the UK and Europe, which import most of their energy and fuel,A rise in inflation could force central banks to freeze interest rates and even push them up again next year,Anna Titareva, an economist at UBS Investment Bank, said a majority of the Bank’s monetary policy committee (MPC) will be concerned about higher energy prices.
She said only two of the nine member committee are likely to vote for a cut that was expected before the crisis hit.Beauchamp said the minority on the MPC would be adopting a rational response to imported inflation, which would damage the growth potential of the economy.He said: “The morning has already seen markets begin to price in rate hikes by the European Central Bank and the Bank of England.But that seems odd given the major hit to consumer spending that is about to make itself felt – this is a supply-driven shock, not some huge surge in demand.“Policymakers may well have learned the wrong lesson from 2021, and risk setting off a much deeper recession if they get too trigger-happy on rate hikes.
”The ECB is now expected to raise European rates by July.Markets imply there is now a 70% probability of two 25-basis-point (0.25 percentage point) rate increases by the ECB this year, compared with the one that was priced on Friday.
Alba party to wind up and not contest Scottish election
The Alba party has announced that it will wind up and not field any candidates for the 2026 Scottish parliament election.The pro-independence party was formed in 2021 by the late Alex Salmond as a “new political force” but has been suffering from a sharp fall in membership and a financial crisis.Police Scotland has been investigating alleged “irregularities” in the party’s finances since May.Kenny MacAskill, who defected from the Scottish National party and succeeded Salmond as Alba leader, said the decision taken by the party’s ruling national executive committee on Sunday had been made “with considerable regret”.The Electoral Commission advised the party that, given its financial situation, it should either voluntarily de-register or face statutory de-registration
Private jet used for Nigel Farage Chagos stunt linked to Reform mega-donor
Nigel Farage’s attempt to reach the Chagos Islands military base was made on a private jet that appears to be linked to Reform UK’s mega-donor Christopher Harborne, it has emerged.Harborne, who has donated £12m to Reform UK, has links to the plane that flew Farage to the Maldives, and another that flew a group of Chagossian campaigners to Sri Lanka before they set out for the archipelago by boat.The Thailand-based cryptocurrency and aviation investor did not reply to requests for comment about whether he owns the planes that facilitated the stunt. The trip ended in failure for the Reform UK leader after he was unable to reach the islands without permission from the UK government to access the military base.Farage said he undertook the trip to highlight the plight of the Chagossians, whose families were removed from the islands in the 1960s and are seeking to return
It’s a crowded field for worst Tory leader | Brief letters
John Crace asserts that Kemi Badenoch is “the worst leader of the Tory party in living memory” (Badenoch gives a borderline disgraceful performance at PMQs on Iran, 4 March). Really? Worse than Liz Truss?Roshi SaulAvening, Gloucestershire A warm welcome to “Britain’s newest affordable towns” (Revealed: the new affordable commuter hotspots in Great Britain, 7 March). Could this replace the Fantasy house hunt series, please?John PellingCoddenham, Suffolk Perhaps it takes longer to learn dog owners’ names because they don’t so frequently have to be called to heel (Letters, 5 March). Maggie’s owner, whom I first met while dog walking on the sand dunes at least seven years ago, decided to introduce himself last week.Valerie PedlarSouthport, Merseyside Emma Brockes reports that the most shoplifted chocolate in London is Ferrero Rocher (Digested week, 27 February)
Starmer speaks with Trump after president criticises lack of UK support for Iran strikes
Keir Starmer sought to repair fractured relations with Donald Trump over the war with Iran on Sunday, as a Labour backlash gathered pace over Tony Blair’s assertion the UK should have supported the US’s initial airstrikes on Iran.The prime minister spoke to the US president on Sunday afternoon after a barrage of criticism from Trump, who told his UK ally on Saturday that his help was not needed, even as the US continued to use UK bases for strikes against Iran.After a breakdown in relations between Trump and Starmer, which led the US president to declare on social media that “We don’t need people that join wars after we’ve already won”, the two world leaders spoke on Sunday to discuss their nations’ military cooperation.A Downing Street spokesperson said the leaders “began by discussing the latest situation in the Middle East and the military cooperation between the UK and US through the use of RAF bases in support of the collective self-defence of partners in the region”.The call came after warnings that Starmer’s initial refusal to allow the US military aircraft to use British airbases had “ruined” the special relationship between the two countries
Labour accuses Badenoch of scoring ‘cheap political points’ over Iran strikes
Labour has accused Kemi Badenoch of scoring “cheap political points” after the Conservative party leader said Keir Starmer was “too scared” to join strikes on Iran.Al Carns, the defence minister, said “serious politics” was required in response to Badenoch’s speech at the party’s spring conference where she criticised the prime minister’s stance on the US-Israel strikes on Iran a week ago.Initially, Starmer did not allow the US to use UK RAF bases for the attack, and did not take part in initial military action against Iran, but then said the RAF would take part in defensive operations. A strike by an Iranian drone hit an aircraft hangar at RAF Akrotiri in Cyprus.Badenoch told the Conservative’s spring conference in Harrogate, North Yorkshire: “At a time when Britain needs strong and decisive leadership, we have a prime minister who is too afraid of making the wrong decision, too afraid to make any decision at all
‘Like fleeing to Southampton’: was Mandelson escape ‘plot’ just a joke?
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