The US-Israel war against Iran could end up costing the monthly bills of more than one million UK households, the Bank of England has predicted, adding that the conflict has caused a “major supply chain crisis” in the global economy.
Financial market turmoil over the Middle East conflict has caused banks to withdraw about 1,500 mortgage products, and many banks have raised interest rates on their remaining 7,000 home loan products in recent weeks, the Bank’s financial policy committee (FPC) said.
The increase, called “Trumpflation” after the American president, has put pressure on families preparing to sign new mortgage contracts, and the Bank predicts that about 5.2 million people – or about 58% of borrowers nationwide – could face high loan payments by the end of 2028.
That compares to 3.9 million before the war began, adding 1.3 million borrowers to the list of households that could be financially squeezed.
Data provider Moneyfacts reported on Wednesday that the average two-year mortgage rate is now 5.84%, up from 4.83% at the start of March.
Caitlyn Eastell, financial analyst at Moneyfacts, said: “It’s been just over a month since the war in the Middle East started, and the impact on borrowers has been immediate as the cost of borrowing has risen dramatically.”
The FPC said the protracted conflict has increased the likelihood of “large, frequent and potential shocks” that could threaten global financial stability.
Overall, the UK’s economic outlook had worsened, adding to pressure on households and businesses, the FPC said. It also said a prolonged conflict could end up exacerbating risks that were mounting before the war, including pressures on sovereign debt markets, extremely high valuations of AI companies, and risky loans arranged by private credit firms that operate outside the regulated banking system.
“The conflict in the Middle East has created fears of a negative supply in the global economy,” the FPC said. “Financial management has been stable so far.”
However, the committee added that “the conflict has made the global environment more unpredictable and followed a period in which global risks had already been raised.
It said that the possibility of multiple shocks at the same time could ultimately “enhance their impact on financial stability and ultimately, the provision of essential financial services to UK households and businesses”.
It said that lenders, investors and other financial firms should be confident in assessing any weaknesses that could expose them to global concerns. “This should include including situations involving sudden and significant price changes in their stress test and financial preparedness,” the committee said.
“Preparing for market stress events should help reduce the risk of financial institutions’ behavior exacerbating any emerging weakness.”
The committee noted the impact the conflict has had on sovereign bonds, including UK gilts, which raise money for the government on international markets. It said that weak growth prospects, high interest rates and increasing pressure on spending could reduce the governments’ ability to respond to future shocks and worsening weaknesses in the credit market.
Part of that had to do with the way international hedge funds have become prominent holders of government debt. “Such conditions increase the risk of an uncontrolled relaxation of conditions resulting in a jump in illiquidity in the primary markets,” it said.
Last month, the Bank kept interest rates at 3.75% but financial markets now expect it to raise rates twice this year.
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