Market Update November 2026

Could an End to the Middle East Conflict Trigger a Sharp Fall in Mortgage Rates?

The Bank of England increased Bank Rate from 3.75% to 4% on 5 November, following September's inflation figures showing inflation rising to 3.5%.

The Bank now expects inflation to approach 5% by mid-2027, largely driven by higher energy prices resulting from the Middle East conflict.

However, there are some potentially encouraging developments which could significantly change the outlook for interest rates and the UK mortgage market.

Why Is the Middle East Conflict So Important?

One of the most interesting findings from the Bank of England's November report is that household energy and motor fuel prices accounted for approximately 60% of the difference between September's inflation rate and the Bank's 2% target.

Following the recent US midterm elections, oil prices fell sharply, with Brent crude reportedly dropping approximately 8.7% in a single day, as markets considered the possibility of increased political pressure for a negotiated end to the conflict with Iran.

The big question is what happens to mortgage rates if the conflict ends or escalates further?

The Positive Scenario - Could Mortgage Rates Fall Sharply?

A lasting resolution to the conflict could remove a substantial part of the additional inflation risk facing the UK.

Lower oil and gas prices would eventually feed through to cheaper fuel, energy bills and business costs. However, financial markets would not need to wait for these savings to reach households.

If investors became confident that energy prices would remain lower, they could immediately begin pricing in fewer future Bank of England rate increases.

This could cause swap rates and government bond yields to fall sharply, potentially allowing mortgage lenders to reduce fixed rates before the Bank of England actually cuts Bank Rate.

The Bank has also reported limited evidence so far of higher energy prices becoming embedded in wider wage and business pricing decisions, which is encouraging.

The key point is that mortgage rates could improve months before households see the benefit of lower energy bills.

The Negative Scenario - What if the Conflict Escalates?

The opposite is equally important to consider.

If the conflict escalates further, particularly through disruption to oil and gas production or shipping routes, energy prices could increase significantly.

This could result in higher fuel costs, increased household bills and further pressure on businesses, potentially keeping UK inflation elevated for longer.

In that scenario, financial markets could price in additional Bank of England rate increases, pushing swap rates higher and potentially leading to more expensive fixed mortgage products.

It could also place additional pressure on household affordability and confidence in the property market.

Where Could Interest Rates Go Next?

Financial markets had previously been pricing in Bank Rate potentially approaching 5%, with the Bank of England's November report showing a market-implied path reaching approximately 4.9% towards the end of 2027.

However, the Bank's survey of market participants showed a more moderate outlook, with a median expectation of 4.25% by February 2027.

This demonstrates just how uncertain the outlook remains.

If the conflict moves towards a resolution, inflation expectations could fall and mortgage pricing may improve. If it escalates, the opposite could happen.

For mortgage borrowers, the important message is that fixed rates can change significantly before the Bank of England makes its next interest rate decision.