The Bank of England will raise the cost of borrowing four times this year, pushing UK interest rates from 3.75% to 4.75% amid the conflict in the Middle East, according to financial market speculators.
In a blow to mortgage payers, international investors are betting that the UK is vulnerable to a sustained rise in inflation after the US-Israel attack on Iran.
Financial market data implies investors believe the Bank will attempt to tackle spiralling prices with four quarter-point increases in rates before the end of December.
Last week, after the Bank’s monetary policy committee (MPC) left rates on hold signalled it could be forced to increase borrowing costs in the coming months as the US-Israel war on Iran threatens to drive inflation in the UK above 3%.
However, the Bank’s governor, Andrew Bailey, suggested the financial markets were getting ahead of themselves in expecting rate rises this year.
Expectations that the Bank will raise rates several times this year has driven up the cost of fixed-rate mortgages and is having a “catastrophic impact” on the home loans market, the comparison site Moneyfacts said.
The average two-year fixed residential mortgage rate on Monday was 5.43%, up from 5.35% on Friday – the highest level since February 2025, and up from 4.83% at the start of March.
Hundreds of mortgage products have been pulled from the market. There are 6,144 residential mortgage products available, down from 6,659 on Friday.
Some analysts cast doubt on the likelihood of four rate rises this year. Derek Halpenny, the head of research in global markets for Europe, the Middle East and Africa at MUFG, said the expectation of four rate rises was “overdone”.
Goldman Sachs said UK interest rate rises this year were unlikely. In a note to clients published on Friday, it said: “Our economists now think that the MPC will remain on hold for longer and maintain [the base rate] at 3.75% throughout 2026.”
But investors appear increasingly convinced that the Bank will tighten monetary policy, in an attempt to prevent higher energy prices from feeding into high wage demands and retail price increases.
A growing sense of panic in global financial markets grew over the weekend as oil shortages across Asian economies became more stark and Donald Trump said on Saturday that he was giving Iran 48 hours – until shortly before midnight GMT on Monday – to open the strait of Hormuz. It carries about a fifth of global oil and liquefied natural gas supplies.
India revealed it was poised to buy Iranian oil should Tehran be able to sail its own tankers through the strait.
In a rush to safe havens, investors bought US assets, pushing the dollar to fresh highs this year.
Global stock markets fell on Monday and gold also dropped, by 6% to $4,218 an ounce, down almost $5,600 an ounce in late January.
The UK was one of many losers, as the value of its currency sank. Demand for its bonds, which dropped in value, pushed the yield or interest rate – to its highest level since 2008.
Sterling weakened 0.18% to $1.332, though the decline was arrested by forecasts that the Bank would increase rates, making it more attractive to hold assets in the UK.
The 10-year gilt yield climbed 0.06 percentage points on Monday morning to 5.05%. Since the conflict in the Middle East began, the 10-year yield has risen 0.8 percentage points, putting gilts on course for their worst month since the “mini-budget” crisis in 2022.
Chris Beauchamp, the chief analyst at the stockbroker IG, said: “Investors who have spent the weekend watching fresh strikes in the Middle East are now waiting to see what will happen when Trump’s 48-hour deadline expires tonight. But they are in no mood to hang around, and have continued to sell stocks and precious metals.
“Each day that the war goes does more damage to the global economy and drives inflation higher, with recession chances rising by the hour,” he added.
