1. Rate rises could be on the way
Recently, most economists anticipated interest rates would decline this year, but the conflict in Iran has altered expectations. Although the Bank of England maintained rates this month, it indicated that increases might occur later in the year.
Due to the "uncertainty around the severity and duration" of the war, the Bank evaluated multiple scenarios to guide its forthcoming decisions.
In the scenario weighted most heavily by the Bank governor, where energy prices gradually decrease, the rate-setting committee's discussions imply that one or two rate hikes may be forthcoming.
In the most adverse scenario, which assumes oil prices remain above $120 per barrel throughout the year and inflation exceeds 6% early next year, up to six rate increases could occur, potentially raising the Bank's base rate to 5.5%.
Any increase in rates would raise borrowing costs and also improve returns on savings.
2. Millions face £80-a-month rise in mortgage bill
More than seven million homeowners hold fixed-rate mortgages, representing 87% of all mortgages.
Fixed mortgage interest rates remain unchanged until the deal expires, typically after two or five years, at which point a new deal is selected.
The Bank's rate-setting committee reports that over the next three years, average monthly payments for those entering new deals are expected to increase by approximately £80.
However, this figure is an average and may vary significantly; it also depends partly on energy price forecasts, which have broad economic effects.
Approximately 53% of UK mortgage holders are projected to experience payment increases, while around 25% of those with fixed mortgages at higher rates may see payments decrease despite recent rate rises.
3. Energy bills will go up – but not as much as they did in 2022
Given the Middle East conflict, a rise in domestic energy bills this summer was already expected. The Bank presents a relatively bleak outlook amid ongoing uncertainty, noting that recovery in the region and the broader energy sector will take time, leading to higher prices.
Ofgem's price cap regulates bills for millions of households in England, Scotland, and Wales. For a household with typical gas and electricity usage, the current annual bill is £1,641. The Bank projects this will increase "close to £1,900" in July and remain at that level for the rest of the year.
Nonetheless, the peak will not reach the heights seen after Russia's invasion of Ukraine in 2022. Additionally, nearly 40% of households currently have fixed tariffs for electricity and gas, compared to roughly 25% four years ago when prices surged. These households will be shielded from price increases until their contracts expire.
Households using prepayment meters may reduce energy consumption during the warmer months. The Bank notes,
"If prices are still high in the winter, then these households will face larger rises in costs,"highlighting the risk of increased expenses later in the year.
4. Low-income households will be less able to cope
In every scenario the Bank outlines, inflation accelerates this year due to rising energy prices, which also increase food costs, creating uncertainty about future developments.
The Bank anticipates food price inflation could reach 4.6% in September and potentially rise further later in the year.
Because food and fuel are essential, increases in these costs disproportionately affect lower-income households, for whom these expenses constitute a larger share of income.
The Bank observes that some individuals can reduce energy use or draw on savings to manage higher bills, but this is more difficult for lower-income families.
During Covid lockdowns, some families accumulated savings, but compared to the 2022 price surge, a greater proportion of lower-income households now have less than two weeks of income saved, according to the Bank.
While borrowing options have expanded, they present additional challenges.
5. Unemployment could rise further
Despite a recent unexpected decrease in the jobless rate, UK unemployment has been gradually increasing over the past year.
The Bank cautioned that unemployment may rise further as households choose to save more and reduce spending out of caution.
Weaker demand could lead firms to reduce hiring, especially as they face rising costs from higher energy prices.
Although inflation is expected to increase, the Bank does not anticipate this will translate into higher wages this year, since most 2026 pay settlements have already been finalized.
However, some committee members noted that elevated inflation could influence wage negotiations in 2027.
