Oil Prices, Geopolitics and UK Interest Rates: Why Markets Are Repricing Borrowing Costs

The escalation in the Middle East has quickly begun to influence financial markets — particularly expectations for UK interest rates and borrowing costs.

Energy prices have moved higher, equity markets have turned more volatile, and investors are reassessing how quickly central banks may be able to cut rates. The shift has been notable over the past week, with markets moving away from a relatively smooth rate-cutting narrative toward a more cautious outlook.

For UK Property borrowers and lenders alike, the key transmission mechanism is energy.

The oil shock markets are beginning to price

Brent crude oil moved above $100 per barrel yesterday – mirroring movements the earlier in the week — a level where energy costs have historically started to feed more noticeably into inflation expectations.

Markets are increasingly focused on potential disruption to global supply. Roughly 20% of global oil shipments pass through the Strait of Hormuz, making it one of the most strategically sensitive shipping routes in the world. 

Some temporary relief came this week after IEA member countries agreed to release around 400 million barrels from emergency reserves in an effort to stabilise markets and offset the disruption caused by the conflict. However, that relief proved short-lived after crude tankers were hit in Iraqi waters and Oman evacuated its key oil export terminal, reinforcing concerns that supply routes in the region are becoming increasingly vulnerable, and leading to the surge in prices on Thursday.

This is significant because it suggests the disruption may be spreading beyond the Strait of Hormuz itself. Until recently, markets had been focused on how quickly oil flows through the Strait could resume. But with attacks now affecting ports outside the Strait, including key Gulf export terminals, it raises the possibility of wider supply disruptions. In other words, it is no longer just tankers being unable to transit the Strait, port operations themselves are starting to be suspended, deepening concerns about global oil supply, which would in turn keep energy prices elevated.

What this could mean for inflation

Higher energy prices tend to feed into inflation with a lag, but the impact can still be meaningful.

Current estimates suggest the recent move in oil prices could add roughly 0.3 percentage points to UK CPI by year-end if prices remain around current levels. If energy markets tighten further, the inflation effect could be larger.

For central banks, this creates a familiar balancing act. Energy shocks can push inflation higher while also dampening economic growth — a combination that encourages caution around the pace of policy easing.

That does not necessarily mean interest rates need to rise again. The Bank of England has historically shown a willingness to look through temporary energy-driven inflation shocks.

But it does add uncertainty and may mean policymakers move more gradually than markets previously expected.

Markets have already adjusted rate expectations

The repricing in interest rate expectations has been swift.

Only a week ago, markets were broadly pricing around 50 basis points of Bank of England rate cuts during 2026. More recently, those expectations have been scaled back as investors reassess the potential inflation impact of higher energy prices.

Swap rates — which underpin much of the pricing across mortgage and specialist lending markets — have also moved higher in response, with two- and five-year swaps returning to around 4%.

Movements in swap markets tend to feed through into borrowing costs well before any central bank decision is made.

Why this does not necessarily repeat the 2022 shock

While comparisons with the 2022 energy shock are understandable, the macroeconomic backdrop today is quite different.

Interest rates are already in restrictive territory, global growth is more moderate, and central bank balance sheets have been shrinking rather than expanding. Sterling has also been relatively resilient, which helps limit the pass-through of imported inflation.

Taken together, this suggests policymakers are entering the current period of volatility from a more stable starting point.

That should reduce the likelihood of the kind of aggressive tightening cycle seen earlier in the decade.

The takeaway

Markets are still adjusting to a fast-moving geopolitical situation, and interest-rate expectations may continue to shift in the near term.

For now, the most likely outcome appears to be a period of greater caution around rate cuts rather than a clear move toward tightening.

For borrowers and lenders, the key signals will come from inflation expectations and energy prices over the coming months.

If those pressures begin to stabilise, the broader direction of travel for rates — gradually lower over time — is unlikely to have changed.