Iran War Hits UK Wallets|Rate Hike Storm Brewing

Oil Shock & BoE Warning

NatWest just posted its best quarterly profit in years — £2 billion — and in the same breath warned Britain may be heading for stagflation. That is not a contradiction. That is the math of a war economy.

Since the US and Israel launched strikes on Iran in late February, oil has surged to $126 a barrel. The Strait of Hormuz, through which roughly 20% of the world's daily oil supply normally passes, has been effectively choked. Every $10 rise in the crude price pushes UK pump prices up by approximately 7 pence per litre. Petrol peaked at 158p. Diesel hit 191p. Filling a family car now costs £27 more than it did before the conflict began.

That energy spike is feeding directly into mortgage markets. Before the war, the expectation was a steady fall in borrowing costs. The opposite has happened. The average two-year fixed mortgage rate has jumped from 4.83% to 5.78% since March. The Bank of England held its base rate at 3.75% this week — but the language around that decision was anything but reassuring. The Bank's chief economist has backed faster rate hikes if inflation persists. Governor Bailey has described the current situation as the most difficult the institution has faced in years. The Bank now projects average monthly mortgage payments to rise by £80 for those rolling onto new deals in the next three years.

NatWest benefits from exactly this environment — higher rates expand net interest margins, which is why profits surged. But the bank's own economists are cutting their UK growth forecasts, warning that a combination of war-driven energy inflation and Labour's tax rises could tip the economy toward the same stagflation trap that broke Western economies in the 1970s. The UAE's decision to quit OPEC, effective May 1st, adds a further destabilising layer. Abu Dhabi wants to pump more — but the timing, as the Hormuz blockade holds, means any production increase faces the same shipping chokepoint. More oil being drilled does not help if it cannot move.

Fertiliser Crisis & Food Shock

The oil shock has a second mechanism that most households have not yet felt — but will. Fertiliser prices have risen 80% since the war began. The reason is structural. Natural gas is the primary feedstock for nitrogen-based fertilisers. When energy markets break, agricultural input markets follow within weeks.

Svein Tore Holsether, the chief executive of Yara — one of the world's largest fertiliser producers — told the BBC this week that the disruption to Hormuz shipping has already cut global nitrogen fertiliser production by up to half a million tonnes. His estimate of the downstream consequence: up to 10 billion meals that will not be produced every week as a result of inadequate fertiliser supply. That is not a figure drawn from worst-case modelling. It follows directly from the agronomic reality that reducing nitrogen application can cut crop yields by as much as 50% in the first season.

The impact is not uniform. The UK is unlikely to face physical food shortages. European production satisfies roughly 70% of domestic demand. But the UK's Food and Drink Federation has already forecast food inflation could hit 10% by December. The Bank of England's own projection puts food price inflation at 4.6% by September, with upside risk beyond that. In Asia, Bangladesh, India and Sri Lanka are facing fertiliser shortfalls now, during active planting season. The consequences for rice and grain harvests will not show up in global food prices until late 2026 — but when they do, they will. The World Food Programme has warned of a bidding war between rich and poor nations for diminishing food supplies. Britain, with its purchasing power, would likely win that auction. The countries it outbids would not.

For UK high street retailers, the squeeze is already visible. April recorded its worst sales performance in a decade. Consumers are directing spending toward essentials — energy, food, fuel — and cutting everything else. Evoke, the William Hill owner, is closing 270 betting shops. Premier Inn's parent company is axing nearly 4,000 jobs, citing Labour's tax increases and the war simultaneously. Shoe Zone has warned of losses exceeding £1 million. High street sales are on track for their sharpest annual decline in over 40 years.

The Conditional Outlook

Two forces now dominate the UK economic picture, and they are moving in the same direction. Energy inflation from the Hormuz blockade is keeping interest rates higher than the economy can comfortably sustain. Labour's employer tax increases, which took effect in April, are compressing hiring budgets at the worst possible moment. The CBI chief has warned these are the largest tax hikes on jobs in the developed world. The Bank of England is simultaneously watching inflation rise and growth slow — a combination that limits its options in both directions.

The weight of evidence currently points toward a prolonged stagflationary squeeze lasting through at least Q3 2026. That judgment rests on one condition: that the Strait of Hormuz remains partially or fully blocked. If the diplomatic track between Washington and Tehran produces a ceasefire or reopening of the strait, oil could fall sharply — early reporting suggests $90 oil is possible within weeks of a reopening. That would relieve mortgage market pressure, soften energy bills ahead of the October Ofgem reset, and give the Bank of England room to cut rather than hike. In that scenario, NatWest's stagflation warning becomes too pessimistic, consumer spending recovers from its April trough, and the fertiliser crisis eases before the Asian harvest gap becomes a global food price event.

The recovery scenario is real and the timeline is fast — oil markets respond to Hormuz signals within days, not months. But it requires political movement that has not materialised. US-Iran talks stalled this week. Trump hardened his stance publicly. The Bank of England is now pricing in rate hikes, not cuts, for summer. The two benchmarks worth watching: any movement in crude below $110 will signal that market participants believe a diplomatic breakthrough is approaching, and any upward revision to the Bank's August inflation forecast will confirm that hikes, not holds, are the base case. If crude stays above $115 and August projections rise, the stagflation path becomes the only path the data supports.