The Iran war could increase mortgage and rent payments in the UK, Europe and the US – as well as pushing up the cost of living.
Just today, the head of mortgages at one of Britain’s biggest lenders, Halifax, warned that “geopolitical uncertainties” could mean borrowing costs stay higher for longer.
Here’s why.
The US and Israel have been striking Iran since Saturday and the Iranian regime has hit back against America’s allies in the Middle East including Saudi Arabia and the UAE.
These are some of the world’s biggest suppliers of oil and when supply is threatened like this, the price goes up. By midday on Tuesday, Brent crude (a key benchmark for the wider cost of oil) had risen 12 per cent in five days. The price leapt again on Friday 6 March after the Qatari energy minister told the Financial Times the Gulf could stop energy exports “within days”.
And it’s not just oil. When one key fuel becomes more expensive, traders start buying up other fuels like gas, which makes those commodities more costly too. Natural gas is nearly twice as expensive as it was last Friday before the US-Israeli strikes on Iran started.
So how does this push up prices, mortgages and rent here in the UK?
The products we buy every day – from tomatoes to toilet roll – all depend on oil and gas to be made, grown or transported to us.
So when fuels become more expensive, the companies that make and move those everyday items pass on their extra costs to customers in the form of higher prices. When this happens economy-wide, we call it inflation.
In the UK, the Bank of England is in charge of keeping inflation low, at around 2 per cent a year.
It’s not all powerful. There are some things, like a major international war, that it can’t control. But it does have one way to try and minimise inflation: setting the base rate of interest. This effectively becomes the lowest amount that a bank can charge ordinary people and companies to borrow money.
Raising the base rate can help reduce inflation because if it’s harder to get new loans and repayments on existing borrowing are more expensive, people spend less, the economy slows down and firms are less able to raise their prices because consumers just can’t afford it.
Given we expect inflation to rise due to the Iran war, traders now consider it more likely that the Bank of England will raise the base rate, or at least not go ahead with cutting it as had previously been expected.
All that means that if you’re taking out a mortgage – or renting from a landlord who has one – in the next few years, it’ll probably cost you more than it would have if the latest conflict in the Middle East hadn’t happened.