Economic update: Middle East conflict and the UK economy

The rise in energy prices due to the conflict in the Middle East is expected to lead to higher inflation in the UK. Petrol prices have already increased and household gas bills seem likely to increase later in 2026. Previously anticipated interest rate cuts by the Bank of England now seem unlikely to materialise, and rate hikes are now possible.

This economic update concentrates on the potential effects of the conflict in the Middle East on the UK’s economy, summarising developments to date and assessing the outlook.

The scale of disruption to oil and gas production in the Middle East

On 28 February 2026, Israel and the United States began a campaign of military strikes against Iran. In response, Iran launched strikes against Israel, regional US military bases and targets in many nearby Arab states, including energy infrastructure.

In addition, Iran has attacked and made threats against ships travelling through the Strait of Hormuz, a narrow sea lane that links the Arab/Persian Gulf to the Gulf of Oman and the wider seas. The result has been a massive decline in shipping traffic in the Strait of Hormuz, notably curtailing the export of oil and gas from the Persian Gulf.

In mid-March 2026, the International Energy Agency estimated that around 20 million barrels of oil per day had been affected by the drop in shipping in the Strait of Hormuz, with oil production cut by at least 10 million barrels in the Gulf countries (about 10% of global production).

Liquified natural gas exports from the region, notably from Qatar and the United Arab Emirates, have also been severely disrupted.

How much have oil and gas prices risen?

The result of this disruption to energy supplies has been a sharp rise in the prices of oil, other petroleum products and natural gas on international financial markets.

Brent crude oil (an international benchmark price for oil) rose from around $70 a barrel before the conflict began to temporary peaks of over $100 a barrel, as the chart below shows. Prices have been volatile, reacting to developments as they have unfolded.

Source: Financial Times (various editions)

UK wholesale natural gas prices also rose by roughly 75% between late February and 23 March 2026. Prices of other petroleum-based commodities, such as jet fuel and heating oil have risen sharply too.

As the Persian Gulf is an important hub for fertiliser production and exports, fertiliser prices have also risen, raising agricultural costs and potentially threatening future crop yields. Helium production has also been affected, as Qatar produces about 30% of the world's supply. Helium is essential for manufacturing a range of products, including semiconductors.

UK prices expected to increase

The initial economic consequences of the conflict have already been felt in the UK. Petrol prices have already risen by 14 pence a litre (about 10%) between 28 February and 23 March, while diesel prices have risen by 29 pence a litre (about 20%). Farmers have reported large increases in the cost of farmers’ fuel and fertiliser.

The rise in natural gas prices is likely to lead to higher household gas prices. The Cornwall Insights consultancy has estimated that there will be However, this is only an early estimate, and the actual increase will depend on how prices change over the next few months.

Many businesses also face higher costs. This could result in affected businesses raising their prices in turn, although this will depend on several factors, including whether businesses can increase prices without losing customers and, businesses’ ability to absorb higher costs. For example, the National Farmers’ Union has warned that food prices are likely to rise due to higher energy and fertiliser costs, while the manufacturers’ trade body Make UK warned about the impact of high industrial energy costs’ on the manufacturing sector.

UK inflation forecasts raised

Unsurprisingly, forecasts for consumer price inflation (CPI) have been raised. Prior to the conflict, the inflation rate – the annual percentage change in consumer prices – had been expected to fall from 3.0% at the beginning of 2026 to closer to 2% from April 2026 and remain at a similar rate for the rest of the year.

While forecasting is particularly difficult due to the uncertainty over how long the conflict and disruption to energy production and transportation will last, inflation is now expected to be higher than previously anticipated.

On 19 March 2026, the Bank of England said, based on preliminary estimates, that CPI is now likely to be between 3% and 3.5% in second and third quarters of 2026, due to higher energy prices. Other forecasters have also raised their inflation projections.

*Quarterly forecasts; Mar’26 projections are from the minutes of the Monetary Policy Committee meeting ending 18 Mar 2026.
Sources: ONS monthly outturn data up to Jan 2026, then quarterly forecasts from Bank of England, Monetary Policy Report, 5 Feb 2026 and Bank of England, Monetary Policy Summary, 19 Mar 2026

Bank of England no longer expected to cut interest rates in 2026

The Bank of England’s Monetary Policy Committee (MPC) announced on 19 March that it had left its main interest rate unchanged at 3.75%. Prior to the Middle East conflict, the MPC had been expected to cut rates at this meeting, given that inflation was expected to fall to the Bank’s 2% target and given that economic growth was subdued (and therefore unlikely to generate inflation).

Source: Bank of England, Official Bank Rate history

The MPC now says that it will closely monitor developments. It will keep an eye on any ‘second round’ (or knock-on) effects coming from higher energy prices. This could be firms raising their prices due to higher costs and/or workers asking for higher wages as a result of higher prices. The MPC said this could potentially lead to “self-perpetuating behaviour in wage and price dynamics, which could embed domestic inflationary pressures”.

Financial markets no longer expect the MPC to cut rates in 2026. Indeed, at the time of publication, (although some economists don't think this is likely).

Higher interest rate expectations have led to a rise in wholesale borrowing costs for mortgage lenders (as interest rates on ‘swaps’ increase), leading to building society and bank-offered mortgage interest rates rising swiftly in March 2026. It has also led to interest rates on UK Government bonds (or ‘gilts’) rising.

Effect on UK GDP

As the UK is a net energy importer, higher energy costs are likely to result in the UK economic activity weakening. For example, consumers will likely rein in their spending as a result of higher inflation squeezing their budgets.

Forecasts for UK GDP growth in 2026 have been cut, with Barclays and the KPMG consultancy forecasting growth of 0.7% in 2026, while Oxford Economics expects 0.4% growth and Pantheon Macroeconomics anticipates 0.6% growth. Prior to the conflict, the Office for Budget Responsibility had forecast GDP growth of 1.1% in 2026.

Slower GDP growth may lead to downward pressure on inflation, as less demand for goods and services leads to some firms pricing more competitively in order to attract customers. However, this would take time and may be overwhelmed by the more immediate oil and gas supply shock pushing up prices across the economy.

How severe this shock is for the UK economy, at least in the near term, will primarily be determined by decisions made overseas.